NZ residential rental market news, November 10

An oncoming flood in the market, more flood-induced buyouts, and banks tell customers to expect more rate rises.

This week's TLDRs...

FHBs hit record-high market share 

FHBs accounted for 27% of purchases in the third quarter, a new record high, well above the long-term average of 21%. 
FHBs use methods like low-deposit lending, KiwiSaver, and grants to buy their first homes. 
Their market share is higher in all six main centres, with Wellington leading at 33% and Tauranga at 21%. 
Invercargill has the strongest FHB market share in provincial markets at 32%. 
The median price paid by FHBs decreased from $720,000 in 2022 to $690,000 in 2023. 
FHBs often enter the market above the "bottom rung," paying less than all buyers but more than the lower quartile. 
Most FHB purchases are standalone houses (71%), but flats have increased to 22%. 
In Auckland, Christchurch, and Wellington, FHB purchases for houses are comparatively low. 
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New homes are getting smaller and more expensive

The average size of new homes has decreased by 30% in the last 10 years while construction costs more than doubled in the same period. 
The average floor area of new dwellings dropped from 195 sqm in 2013 to 136 sqm in 2023 while the estimated construction cost increased from $1598 to $3225 per sqm. 
The average build cost over the same period rose by just over $100,000. 
The shift to smaller homes is due to a move from stand-alone houses to multi-unit dwellings. 
Stand-alone houses went from 81% of new dwellings in 2013 to 40% in 2023. 
Number of new townhouses and home units consented increased more than ten-fold over 10 years. 
Despite smaller sizes, more new homes are being built, with a 66% increase when compared to 10 years ago. 
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Slight bump in activity seen by Barfoot & Thompson

Barfoot & Thompson's October sales increased 35% compared to October last year. 
The average sale price in October was $1.09 million, the highest in the past four months. 
There was a surge in new listings in October, with 1829 new listings received. 
Properties in the $1 million to $2 million bracket made up more than half of sales for the first time this year. 
Properties selling for over $2 million accounted for 6.6%.
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Kelvin Davidson’s mid-week highlights

Debt-to-Income Ratios on Hold 
The RBNZ's Financial Stability Report did not announce immediate changes to DTIs, which remain under consideration, with consultations planned in early 2023, and potential implementation around mid-2024. 

Softer Labor Market in Q3 

Stats NZ reported a drop in employment in the third quarter, causing the unemployment rate to rise to 3.9%. 
The increase in unemployment is seen as temporary, and the labor market remains relatively strong. 

End of Housing Downturn 

The CoreLogic House Price Index for October showed a 0.4% increase in national average property values, ending an 18-month housing downturn. 
Housing market recovery is expected to be gradual due to affordability constraints and stable mortgage rates. 

Recession Fears Easing 

Recent data, including ANZ business confidence and the NZ Activity Index, suggests a delay in the onset of a recession. 
Economic conditions appear more favourable for property market recovery, but global uncertainty remains a concern. 
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Tony Alexander on the house price revival and what threatens it

A rising demand for housing is fuelled by record net migration flows (110,000 people in the past year). 
The migration flow's decline may take over a year to return to pre-boom levels. 
FHBs are motivated by rising deposits, good wages growth, Kainga Ora funding, listings, and lower prices. 
Investors are expected to enter the market as the bright-line test shortens and interest expense deductibility is restored. 
Additional demand may come from upper-end buyers if National's policy to allow foreign purchases of houses over $2 million is enacted. 
Some buyers avoid new builds due to lost deposits, delays, and rising building costs, while house prices remain steady. 
Rising rents, rental property competition, and tenant rule changes encourage renters to consider homeownership. 
New house supply is decreasing, with a 20% drop in consents issued in the past year. 
Supply reduction may reverse around early 2025, but it's likely to coincide with falling interest rates, leading to increased demand. 
Anticipated price increases include up to 5% in 2023, 10% in 2024, and 15% through 2025, possibly reaching late 2021 levels in Q2 2025. 
These increases are primarily driven by the three major cities due to the migration boom. 
External threats to this outlook include conflict in the Middle East, potential Reserve Bank interest rate increases, and China's property sector issues. 
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What will the new government’s housing policies look like?

The final election results indicate that National, Act, and New Zealand First need to form a coalition government. 
National's campaign promise included tax cuts funded by taxing $2 million-plus property purchases by foreign buyers, which New Zealand First opposes. 
Leading economists expect the coalition government to reinstate interest rate deductibility for investment properties and reduce the bright-line test from 10 to two years. 
The proposed 15% foreign buyer tax may be challenging to secure New Zealand First's support. 
House price forecasts for next year range from 4% to possibly up to 10%, which may affect the building of new homes. 
Reviewing the role of Kainga Ora and moving toward community housing provider models is on the agenda for the coalition. 
Medium Density Residential Standards and tenancy protections, like no-fault evictions, could be points of difference and hold potential market impacts. 
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A reduction of the bright-line test coupled with high interest rates could see the market “flooded”

If National reduces the bright-line test to two years, "mum and dad" investors may flood the property market from mid-next year. 
The bright-line test currently stands at 10 years for properties bought after March 27, 2021. 
Interest rates have risen to over 7%, making it difficult for some investors to cover their mortgage repayments with rental income. 
Some experts predict an increase in property listings due to changes in the bright-line rule, particularly for newish two and three-bedroom townhouses. 
Most investors are not expected to sell their properties immediately due to bright-line rule changes, but rising taxes may prompt some to consider selling. 
National is in coalition talks with minority parties, and policies could change based on these negotiations.
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KO’s FHB scheme under pressure

Prospective FHBs using the Kāinga Ora scheme are facing a limited timeframe. 
The First Home Partner scheme stopped accepting new applications in September due to high demand and approved buyers are now in a rush to find a home under the scheme. 
Eligibility rules for the scheme were eased in August, leading to increased demand. 
Kāinga Ora announced they are approaching their funding limit and may reach it in November. 
Under the scheme, Kāinga Ora buys a stake in the property (up to 25% or $200,000). 
There were 550 deals done before eligibility criteria were eased, and an additional 148 since then. 
Prospective buyers are concerned about the diminishing funding. 
Some are rushing to buy homes, possibly skipping due diligence. 
Mortgage advisers suggest other Kāinga Ora schemes like First Home Loans may be better for some. 
Kāinga Ora announced they will only accept Sale and Purchase Agreements until a specified date and may close off earlier due to high demand. 
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More weather-induced buyouts in Nelson

Nelson City Council plans to buy 10 homes on slip-prone land in The Brook. 
The council's decision follows increased slip risks from council-owned land, which was discovered after heavy rain in August 2022. 
Of the 18 slips caused by the heavy rain in August 2022, three were in The Brook, and the council initially planned to remediate them however, subsequent geotechnical inspections revealed that remediation was no longer feasible, and the slips posed a risk to 10 nearby properties. 
The buyouts will cost an estimated $5.6 million in total and will be funded from the $17.3 million allocated for slip remediation in the council's annual plan. 
The council is currently negotiating with the affected property owners, and details of these negotiations are confidential. 
In addition to these 10 homes, up to 14 more properties damaged by slips originating from private land may also be considered for buyouts, pending public consultation. 
Deputy mayor Rohan O'Neill-Stevens noted the need for a national conversation on how to address the consequences of severe weather events. 
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Owners of category 3 homes are being urged to contact their insurance companies

The Insurance Council advises eligible Auckland homeowners to collaborate with insurers for claim settlements. 
Up to 50 storm-damaged homes are categorised as category 3 each week. 
Buyout offers will be less than the insurance payout, minus a 5% homeowner contribution. 
Homeowners should inform their insurers about being in category 3. 
Waiting or contacting insurers won't financially impact homeowners, so they should communicate their category status. 
Insurers are prioritising category 3 homes and have settled 80% of claims related to Auckland flooding. 
The process for category 3 homes involves damage assessment and repair scope, even if repairs are not feasible for unliveable homes. 
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KO homes not included in Auckland buyout

Flood-damaged state houses in Auckland won't be eligible for a buyout by Kāinga Ora. 
Over 2000 state homes were affected by the floods, with 120 initially deemed unrepairable. 
Auckland Council won't include Crown-owned land in its buyout scheme. 
Auckland Council started informing the worst-affected homeowners about their eligibility, with 25 homeowners in Muriwai falling into category 3. 
Buyout offers will be based on a market appraisal from January 26, just before the flooding. 
The buyout process is expected to take 3 to 6 months and will deduct insurance, EQC claims, and a 5 percent homeowner contribution. 
Homeowners are responsible for settling their insurance claims. 
Any insurance claims collected after the buyout will go to Auckland Council to offset buyout costs. 
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Kiwibank: Few customers stressed by higher mortgage rates

Kiwibank's CEO, Steve Jurkovich, reported that only around 50 home loan customers needed intensive help due to rising mortgage interest rates. 
Kiwibank recently contacted 5,000 home loan customers to discuss their financial situation in light of unprecedented interest rate increases. 
Kiwibank's one-year mortgage rate, currently the most popular term, has risen from 2.5% to 7.25% for those with at least 20% equity. 
Out of the 5,000 customers contacted, around 500 discussed options for reducing payment requirements, with about 300 opting for interest-only payments or extending their loan terms. 
About 20% of Kiwibank's customers have consistently made payments even during falling interest rates and are ahead in their repayments. 
Kiwibank's practice of using higher test rates when assessing customers' ability to repay loans has contributed to their financial resilience. Currently, they use 8.75% as the test rate. 
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Westpac’s customers can expect higher rates

About 88% of Westpac's mortgage customers have already shifted to fixed-term rates of 5% or higher. 
54% of customers are paying interest rates between 5% and 7%. 
Most customers opt for one-year fixed-rate terms. 
Westpac's floating rate is 8.64%, and fixed rates range from 7% to 7.95% for one-year terms. 
Completion of the rate adjustment process is expected by September 30 next year. 
67% of mortgage holders are currently three months ahead on their repayments. 
91% of Westpac's mortgage customers are on fixed rates. 
Mortgage lending represents 66.3% of total net lending. 
Westpac's annual net profit fell by 18% to $963 million, but the figure for its New Zealand subsidiary is not yet disclosed.  
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A slow in Westpac’s mortgage lending

Westpac NZ experienced slower mortgage lending growth in the second half of the year. 
Annual mortgage lending growth decreased to 3%, down from the 5% pace in the first half. 
The mortgage book reached $65.8 billion, up $600 million in the second half, compared to $1.4 billion in the first half. 
Westpac's annual net profit fell by 18%. 
While hardship levels remain low, the number of homeowners behind on repayments has reduced in the past six months. 
Westpac's Australian parent reported an increase in stressed loans and mortgage delinquencies. 
The bank helped 5,565 customers into their first home, a 7% increase from the previous year due to an increase in high loan-to-valuation ratio lending and a rise in lending to customers with deposits of less than 10%.
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Expectations for long-term inflation rise

Survey results reveal expectations for inflation in one and two years have decreased, but expectations for inflation in five and ten years have increased, staying within the RBNZ's 1% to 3% target range. 
ANZ and Westpac economists believe the OCR will need to be raised again, but the market is pricing in the possibility of OCR cuts by May 2024. 
Short-term expectations are gradually declining but long-term inflation expectations and the need for higher OCR settings may persist, requiring elevated OCR levels for an extended period to meet the RBNZ's target. 
OCR cuts may not be considered until early 2025 due to ongoing inflation strength. 
The RBNZ will closely monitor these trends for signs of further increases. 
Westpac is not expecting rate cuts until early 2025. 
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Floating mortgages continue to sink in popularity

New mortgages with fixed interest rates have reached a record high as a share of mortgage lending, as per RBNZ data. 
The share of new residential lending on fixed interest rates rose to 82.8%, up from 81.9% in August, the highest recorded. 
Borrowers are increasingly seeking the cheapest deal in terms of interest rates. 
One and two-year mortgage terms are commonly chosen, with a recent surge in interest in six-month terms. 
New owner-occupier lending in September amounted to $4.44 billion, a 2.1% increase from August. 
One-year fixed terms remain the most popular (27.1% of new lending), but two-year terms have also risen (23.5%). 
Six-month term mortgages constituted 5.3% of owner-occupier new borrowing, with a total of $236 million, suggesting interest in potential rate changes. 
New residential investor mortgage lending was stagnant at $1.26 billion in September. 
One-year fixed terms were the most popular for investors, making up 31.6% of new lending, slightly up from August. 
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