New rules for the real estate market mean that interest rate increases will now have a bigger impact on house prices, according to ANZ economists.
At the end of March, the government announced a series of changes, including an extension of the clear line test and removing the ability of investors to offset interest on rental income for tax purposes.
In a new research report, ANZ economists say house price inflation will slow faster than it otherwise would and that there was a greater risk of house prices falling.
“Affordability and credit constraints mean that the recent pace of house price inflation was never going to be sustainable, but now that the headwind is about to start to bite harder, we believe that the slowdown is looming. ”
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Data from the Real Estate Institute showed that median residential property prices in New Zealand rose 24.3%, from $ 665,000 in March 2020 to $ 826,300 in March of this year, a new record for the country.
ANZ economists said there was an increased risk to the economy as a whole.
“We don’t expect house prices to fall, but from those heights we certainly wouldn’t rule it out. There are many heavily indebted households that would be very vulnerable if interest rates rise or incomes deteriorate. “
The official cash rate is still at an all-time low of 0.25 percent, but the year the Reserve Bank promised to leave it there is over. There are fears that inflation could increase in the coming months, which could push the bank to raise its rates.
“As far as investors are concerned, it should be noted that interest rate increases no longer provide greater tax compensation,” ANZ economists said.
They calculated that a person with an 80% mortgage would see the financial value of their property drop 9.5% if their mortgage rate reached 5%.
“Interest rate hikes are now more likely to lead investors to sell off, which means a faster drag on the real estate market than ever before. We expect this policy change to have a relatively moderate impact in the near term, but it will make mortgage rate increases even more frightening for the housing market.
“This fuels our hope that the Reserve Bank will be very careful in raising interest rates and may wait too long. The lesson of the ’90s was that tightening policy too late in the face of rising inflationary pressures meant that interest rates (and the exchange rate) had to rise for longer, as policy was really struggling to contain inflation. things.
“It’s possible that it will happen again, but we note that any increase in interest rates is likely to have an impact on things fairly quickly, given both the tax change and the level of household debt.”
They said the game had changed a lot “in a short period of time” for real estate investors, but structural problems with the lack of housing supply remained.
“Overall, the government is likely to succeed in removing the heat from the market, but shifting investors to first-time homebuyers will never be enough to solve the problem of homelessness, overcrowding and the cost of housing. high life in New Zealand. for some of our most vulnerable. For this to happen, the government must continue to actively pursue positive policies on the supply side (such as freeing up land and reducing red tape) to such an extent that it will challenge the rhetoric that housing is essential. rare and always will be, and that housing prices are one-sided bet (not our point of view). But politically, it is not easy to do when so many voters have already bet on housing for their retirement.