It’s Not a Free Market.

It’s Not a Free Market.

For those who cared to look a little deeper than month to month property market activity it was quite clear back in the early 2000s that the property market was a broken system. Broken because the building industry did not have the capacity needed to build the quantity of homes that NZers’ needed every year to house newly formed families. Data available in local and national statistics. Demand has exceeded supply for the best part of two decades, ignoring the immigration effect.

Right now it is possible to buy a new build, something foreigners will still be able to do also, for under $600,000. It’s a back to the future option: a 1950s/ 60s size home of 88 sqm providing 3 bedrooms, 1 living room, 1 bathroom and a kitchen. But unlike the 50s/60s the section is a pocket handkerchief. Most of the new builds however range in price from the mid $600s into the early $700s. And there are a lot of them built or planned on the outskirts of town, and a few within. Many more are to be built in Paerata. These homes are or will soon be direct competition for the mid-price existing home market. A market segment where things are getting tougher. Why?

First home buyers struggle to get mortgage finance. LVR restrictions remain in place. Banks looking ahead at economic and political factors are becoming more conservative or perhaps even cautious. Without money for first home buyers the number of homes promised to be built by politicians is an irrelevant number. And they are to be built by a building industry seeking 20,000 skilled tradesmen from overseas at a time when agreements supporting our new Government aim to reduce immigration by some 30,000 per annum. To be fair the Government speaks in terms of a 3 year lead time for the industry to reach the needed capacity and produce ‘affordable new homes’ in the numbers desperately needed.

As the pool of qualified first home buyers is deliberately limited those families needing to upsize or wanting to change neighbourhoods can’t readily sell and therefore can’t move. Empty nest families wanting to downsize are also caught by the lack of first home buyer activity. They continue to live in oversize homes. The property escalator is broken. Time taken to sell is now longer.

The top market segment has a better balance between supply and demand. Buyers continue to flow from Metropolitan Auckland and the countryside.

The new Government has also clearly signalled that it is going to change the rental market playing rules. Increased tenancy rights. Home warrants of fitness. Rental tax losses not being transferrable to another income stream. Changes such as these along with its clearly stated intent to review capital gains tax provisions, within the scope of a broader review of taxation, are going to put pressure on Mum and Dad investors who typically hold only one or two properties. Should they exit in large numbers the pressure for downward price corrections will increase?

The probability is that the market will stutter on with little real change for several years. Things may become clearer with the signalled pre-Christmas mini budget, if not then with the May 2018 budget.

Demand continues to outstrip supply and a property market crash would have catastrophic effects which we all would feel and which our new Labour based Government would hate to happen on their watch.