Impact of the latest NZ lockdown on house prices and property values

Last year as we came out of lockdown, property prices took off across New Zealand. Will the same thing happen again when our current restrictions lift? Nick Goodall, Head of Research at CoreLogic New Zealand, shares why he thinks this time around will be different.

At a glance:

CoreLogic's Head of Research New Zealand, Nick Goodall says:

• Any growth in the property market post-lockdown is less likely to be as disruptive or significant as last year's boom.
• Increased regulation of investor borrowing has seen more first home buyers enter the market.
• While growth has been strong across New Zealand, regional variation will become more obvious as prices are expected to drop in 2023 and 2024.
• Apartment prices have not performed as well as they did in the period just before the pandemic.

"While the end of the first lockdown brought a property boom throughout most of New Zealand, we don't expect this time around to be anywhere near as disruptive or significant," said Goodall, explaining that market conditions have changed.

Among those changes: we don't have the drop in the official cash rate that was present last time around, Loan-to-Value Ratios (LVR) restrictions have been put into place to curb investment activity, and house prices are less affordable now.

The Centrix August Outlook's analysis of lending data also shows a less pronounced shock to the property market this time around – while demand for credit did drop 30% overnight, last year's drop was a steeper 70%. And even though residential mortgage arrears rates rose slightly through July, they remain low at 1.08% – lower than in January 2020.

“

The market is in a definite slow-down right now and that is likely to continue.”

– Nick Goodall, Head of Research, CoreLogic New Zealand

First-home buyers hold their own against investors

Following the previous lockdown, there was a lot of action from investors, but first-home buyers still held their own, and even started to increase their share this year.

The property boom prompted government intervention to help cool the market, with LVR restrictions requiring investors to provide a 40% deposit. As investors reduced their activity, first-home buyers were responsible for 25.8% of sales in July – the highest proportion since August 2020.

While initiatives including the ability to withdraw first-home deposits from KiwiSaver and various grants are boosting first-home buyers, a Reserve Bank proposal for increased lending restrictions may tighten activity. The change, currently penciled in for October, would impact first-home buyer activity with lower-deposit home loans, but the proposal might be delayed or scrapped with the current situation.

Goodall points to one thing the Government and Reserve Bank are working together on – adding to new supply, which is always a boon for first-home buyers. Tax changes mean that while existing property may be less attractive to investors, new builds are not.

"While the Government and Reserve Bank continue to butt heads a little over housing affordability and financial stability, on one thing they can agree. Prioritising new properties and adding to the overall supply is in all of our best interests," said Goodall.

While capital gains tax now applies to investment property sales within 10 years of purchase under the new bright-line property rule, new builds are treated slightly better. For new builds, capital gains tax will only apply in the first five years.

And while tax deductions on interest payments are largely being phased out for investors, new builds are also exempt from this change.

These changes are likely to boost housing supply, which in turn ought to assist first-home buyers to get into the market.

Pricing disparity between regions is likely to become more apparent in the long term

Property prices across the main centres are all experiencing strong growth on an annual basis – to the end of August 2021 CoreLogic cites Hamilton as having the lowest annual growth rate at 21.8% and Wellington boasting the highest at 35%.

On a quarterly and monthly basis to the end of August, however, growth has been slightly more modest and Hamilton values have actually declined.

Smaller cities are also seeing property value increases on an annual basis, with Palmerston North (39.1%) and Whanganui (41.4%) topping the list for performance. Shorter term, Rotorua and Whangarei have dipped slightly at –0.9% and –0.2% growth respectively over August.

Some of the provincial centres' growth is due to strong local economies and population growth, all without slowing the supply of housing. However, some regions won't have these benefits, which may see their housing prices level out in the future.

"Prices are expected to drop in 2023/24," said Goodall, noting that some regions might be more vulnerable than others. "The upshot is that any drop is likely to be gradual as opposed to significant or sharp falls.".

Apartments have not performed as well during the pandemic

While apartment values have not appreciated as much as house values over the past 18 months, Goodall says they have held steady. The weaker performance is likely due to apartment tenancy challenges, with short-term accommodation and international students affected by travel and lockdown restrictions.

"If we look back to the period before the pandemic, apartment sales were experiencing some of their strongest growth, even quite similar to house sales. To me, this shows that there could be a change in people's wants and expectations to buy more dense property types," said Goodall.

Even in the three months to the end of July 2021, CoreLogic's Pain and Gain report found that the vast majority – 92.9% – of apartments resold for a gross profit

As borders re-open to short-term travellers and international students, resolving some of the tenancy challenges of the past 18 months, we may see apartment value growth catch back up to the growth in house value.

So, the experts have weighed in, and it doesn't seem likely that we will be expecting a property price boom at the end of this lockdown on the scale that we saw last time. Instead, we might see a modest impact in the short-term. We may also see first-home buyers taking advantage of lower investor numbers, the possibility of gradual decreases in property values across some cities and provincial centres through 2023 and 2024, and apartment value growth picking back up as travellers and students return.

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This material has been prepared for information purposes only. This should not be taken as constituting professional advice. You should consider seeking independent legal, financial, taxation or other advice to determine how this information relates to your own circumstances.