Foreign buyer ban comes as Reserve Bank pours a little petrol on the housing market

Thursday, 16 August 2018

Legislation banning foreign buyers of New Zealand houses could take pressure off the housing market, but the law will be introduced at a time when mortgage rates may start falling and the Reserve Bank is considering whether to ease lending restrictions.

OPINION: Based on the Labour Party's previous rhetoric, the ban on foreign buyers might be expected to cause house prices to tumble.

Back in 2015, as house prices in Auckland were soaring, housing spokesman Phil Twyford released research showing how many buyers in Auckland had Chinese sounding names, which he said showed 'offshore Chinese investors are a very significant part of what's going on'.

The comments of Associate Finance Minister David Parker this week - who introduced the legislation to Parliament - suggested the impact would be significant.

'This is a significant milestone and demonstrates this Government's commitment to making the dream of home ownership a reality for more New Zealanders,' Parker said.

'This Government believes that New Zealanders should not be outbid by wealthier foreign buyers. Whether it's a beautiful lakeside or oceanfront estate, or a modest suburban house, this law ensures that the market for our homes is set in New Zealand not on the international market.'

Coming at a time when there are also tax changes to discourage property investors, record consents for new housing, Kiwibuild and the fact that house prices had reached levels which fewer Kiwis could afford, there were predictions of at least a long slow cooling in house price increases and the chance of a correction.

In an interview with Q&A broadcast on Sunday, Reserve Bank Governor Adrian Orr acknowledged the risk of a fall in prices, although this is not what the bank is forecasting.

Associate Finance Minister David Parker says Kiwi home buyers 'should not be outbid by wealthier foreign buyers'.

As Orr warned, whenever a market rises so quickly, the exit from the increase does not tend to be smooth.

But reaction to Orr's statements last week, where he indicated that interest rates would be low for much longer than observers had expected, may have changed the outlook for house prices, over the short term at least.

Although the Reserve Bank indicated that the benchmark official cash rate (OCR) would not be moved up or down until at least 2020, a senior official indicated later that the bank was closer to the 'trigger point' of an interest rate cut.

Orr also confirmed that loan to value (LVR) restrictions, which limit the amount of lending banks can offer to borrowers with relatively small deposits, would be reviewed again in the coming months, adding to speculation that the limits would be relaxed again, at least slightly, by the end of the year.

Financial markets are now taking the prospect of an interest rate cut much more seriously than they did a few months ago.

This has seen the New Zealand dollar drop sharply, and could have an impact on the interest rates on mortgages.

Westpac chief economist Dominick Stephens speculated on Wednesday that as a result of the Reserve Bank's announcement, the interest rate on a two-year fixed-rate mortgage could be around 0.2 percentage points.

This may not sound like a lot, but it reduces the interest repayments on a $500,000 mortgage by $1000, which over the term of the loan could be significant.

Reserve Bank Governor Adrian Orr has welcomed a slowing of house price increases, but his promise to keep interest rates low into 2020 could boost buyer demand.

It has been enough for Westpac to modify its forecasts for house prices over the coming years.

'A drop in mortgage rates of that magnitude, if it comes to pass, will have a powerful effect on the housing market,' Stephens wrote on Wednesday.

Previously Westpac expected house prices to drop in the second half of 2019 'due mainly to tax policy and the foreign buyer ban' before a small rise in 2019.

Since the Reserve Bank announcement, 'the game has now changed', Stephens said.

'The market outlook is now a battle between two powerful opposing forces – Government policies that will cool the market versus Reserve Bank policy that will boost it.'

While he said the battle between Government policy and Reserve Bank policy was uncertain, because it was hard to predict the impact of the foreign buyer ban or tax changes, overall Stephens believes overall the outlook for house prices is stronger than before.

'We are now forecasting essentially flat prices over the remainder of 2018, followed by a sharp, but short-lived, rise in prices for early 2019.'

Westpac estimated house prices could rise 1.5 per cent in the first three months of 2019 - pushing a $600,000 house price up by $9000.

Elsewhere, ASB's housing confidence survey, which measures what households expect for house prices over the coming year, saw an increase in those predicting an increase, although the proportion was below where it was in early 2017 and Auckland was much less optimistic than other parts of New Zealand.

Westpac also warned that any boost to house prices now will simply store up problems later, describing its outlook for house prices 'unrelentingly negative…over the longer term'.

'The Reserve Bank won't be able to hold interest rates down forever – causing rates to drop now will set us up for a larger increase down the track. We expect mortgage rates will rise in the 2020s, and when that happens house prices will take a hit. We are forecasting a house price decline of almost 3 per cent for 2020.'