With Labour in the picture the housing party is definitely over

Thursday, 19 October 2017

Prime Minister designate Jacinda Ardern wants to lead 'a country we can all be proud of'.

OPINION: I'm going to say it: The housing party is definitely over.

It probably already was. The real estate industry claimed that the slowdown of recent months, with turnover down more than a quarter on the year before, was due to little more than pre-election uncertainty. But the change has felt more fundamental than that.

The banks have cut down their mortgage lending dramatically and borrowers have been turned away for deals that might have been a sure bet just six months or a year ago.

A Labour win subdues the fortunes of the housing market.

Loan-to-value restrictions layered on top of that bank caution kept many budding property investors out of the market, now they are required to have at least 40 per cent equity in any deal.

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With Labour as the next government, it means things aren't going to turn around and take off again any time soon.

The current housing market conditions should be seen as the new normal for the next couple of years, at least. Whether we're talking a plateau in prices or a more significant fall from here will remain to be seen. There are predictions of as much as 10 per cent or 13 per cent price falls over the next three years.

There are a few factors at play that will affect whether that proves true.

Immigration: Population growth has been cited as a big part of the reason for house price growth in Auckland, in particular. The city hasn't had enough new building to keep pace with the growing population. If Labour and NZ First decide to turn off the immigration tap, you'd expect some of that demand to disappear. Basic economics then would suggest that the same amount of supply with less demand would mean lower prices – or prices rising less quickly.

But much of the population growth has been because New Zealanders have been opting not to leave. Migration controls won't fix that. And we have a housing shortfall in some parts of the country – not all - that will take some time to right.

Investment: It's hard to avoid the fact that some of the price gains have been driven by investment activity. Investors are the single biggest buyer class in the market, if you separate out first-home buyers from 'movers'. With the prospect of tighter regulation of the way they run their rental properties, it is likely that few will rush to buy until they get a clear picture of what the new environment will look like.

Factor in the fact that the big capital gains of the past five years have vanished and many will sit on the sidelines. The prospect of a capital gains tax shimmering on the horizon won't make them feel any more optimistic, either.

Some may sell if the new government makes landlording an unprofitable experience. If Labour goes ahead with plans to ring-fence tax losses from property, many landlords may no longer be able to justify 'topping up' mortgages if rent does not cover their repayments.

Foreign ownership: If the new government takes a hard line on who can buy property in New Zealand, that could have a big effect on the market. Requiring foreign buyers to purchase only newly constructed property could help boost supply – refer to the supply and demand equation mentioned above.

Building: Labour is promising a large-scale building programme to provide affordable housing. Whether it can meet its targets will have to be seen. If there's less immigration, they may struggle to find enough builders to do the work.

In either case, more affordable homes will probably come at the expense of more expensive homes, which may make higher-priced properties dearer.

Real estate agents won't be pleased at Peters' choice but this was probably a party that had run its course.

Everyone will be better off if house prices level off and incomes rise, allowing New Zealanders to buy homes to live in – even if they are not the sure-bet get-rich-quick investments they once were.