Housing rules 'make interest rate rises scarier'

Wednesday, 21 April 2021

Joel Pauling has been unable to finalise his separation for over a year because the home he has to split keeps rising in value.

New rules for the property market mean interest rate increases will now have more of an impact on house prices, ANZ economists say.

At the end of March, the Government announced a range of changes including an extension to the bright-line test and the removal of investors' ability to offset their loan interest against rental income for tax purposes.

In a new research report, the ANZ economists say that house price inflation will slow more quickly than it otherwise would and there was a greater risk of house price falls.

“Affordability and credit constraints mean the recent pace of house price inflation was never going to be sustainable but now with the policy headwind about to start biting harder, we think the slowdown is looming.”

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Data from the Real Estate Institute showed median prices for residential property across New Zealand increased by 24.3 per cent from $665,000 in March 2020 to $826,300 in March this year, a new record high for the country.

Interest rate increases are now more dangerous for the economy, ANZ economists say.

ANZ’s economists said there was an increased risk to the broader economy.

“We aren’t forecasting house prices to fall, but from these lofty heights we certainly would not rule it out. There are a lot of highly indebted households out there who would be very vulnerable if interest rates were to increase or incomes were to deteriorate.”

The official cash rate is still at an historic low 0.25 per cent but the year for which the Reserve Bank promised to leave it there has finished. There are concerns that inflation could increase in the coming months, which could put pressure on the bank to increase rates.

“In terms of investors, it’s worth noting that interest rate increases no longer bring a larger tax offset,” the ANZ economists said.

They calculated someone with an 80 per cent mortgage would have the financial value of their property fall 9.5 per cent if their mortgage rates hit 5 per cent.

“There’s now a greater chance that interest rate increases could cause investors to sell up, meaning a faster braking impact on the housing market than previously. We’re anticipating this policy change to have a relatively muted impact in the near term, but it makes mortgage rate increases even scarier for the housing market.

“That feeds into our expectation that the Reserve Bank will be very cautious in raising interest rates, and possibly wait too long. The lesson from the 1990s was that tightening policy too late in the face of rising inflation pressures meant interest rates (and the exchange rate) had to go higher for longer, as policy really struggled to rein things in.

“It’s possible that happens again, but we’d note that any increases in interest rates are likely to impact things pretty quickly, given both the tax change and household debt levels.”

They said the game had changed 'a lot in a short space of time' for property investors but the structural issues of a lack of housing supply remained.

“All up, the Government is likely to be successful in taking the heat out of the market, but tilting the playing field from investors towards first-home buyers will never be enough to address New Zealand’s homelessness problem, overcrowding, and high cost of living for some of our most vulnerable. For that, the Government needs to continue to aggressively pursue positive supply side policies (such as freeing up land and cutting red tape) to such an extent that it will challenge the narrative that housing is scarce and always will be, and that house prices are one-way bet (not our view). But politically, that’s not easy to do when so many voters have already bet on housing for their retirement.”