COVID has been a wild card when it comes to how it has affected different countries. While the US has experienced overall financial turmoil, other countries like Singapore have become safe havens thanks to their promising markets.
However, we can factor real estate into the equation for even more variation. The industry has faced almost as many up’s as down’s. Some sectors have suffered the brunt of the financial hit, like office retail. Others, like affordable housing, have gone through unexpected growth amid mortgage rate declines.
New Zealand is part of the later group. Its real estate industry has been booming thanks to the increased housing demand. Low interest rates and low housing supply has caused significant price increases throughout 2020.
Housing Pricing in New Zealand Keeps Rising
As The Guardian reports, New Zealanders are currently experiencing impressive increases for housing prices. It’s very likely for this trend to remain until 2021. The market has been described as “red hot” thanks to its speedy upswing.
Low interest rates are surely a main reason behind it, but the country’s fast recovery from COVID has brought bittersweet results. Economic upswings have empowered buyers, thus increasing demand. Finally, tax system changes are the final straw.
In fact, house pricing has been rising at the fastest rate in over a decade this November. It’s not likely to subside, either, and inflation is predicted at 12.2% next year.
Housing Demand at an All-Time
House price inflation has been increasing steadily, and this trend is expected to last for at least a few months. Property demand has reduced selling time for properties to the lowest levels in four years, and the same is true for real estate stocks.
As mentioned, this inflation might last for a while, with its peak expected around the 16% annual mark for June 2021. The full-year increase for 2021 was the aforementioned 12.2% according to the article.
The median price already sits at a 20% raise for the year, from $605,000 to $725,000 between October 2019 and 2020.
The Main Cause: Interest Rates
Experts agree that the primary reason for these impressive hikes is the new cash rates from New Zealand’s Reserve Bank, sitting at 0.25%. The result is record-low mortgage rates for borrowers, and its repercussions have surpassed migration, supply, and other factors.
It’s quite easy to witness, too. WIth closed borders, migration hasn’t been possible towards the country since April. Similarly, housing supply isn’t really a problem, either; the construction industry hasn’t slowed down significantly.
Investors Have Been Flocking In
However, homeowners aren’t the only drivers behind the rising demand. The low interest rates have also made property an attractive investment, even above their low yields.
Right now, lower yields aren’t a problem for most (if not all) investments. Additionally, lower interest rates favor buying over renting for occupiers. However, the main motivator is the tax rate max increase to 39% while maintaining low taxes on capital gains.
The Reserve Bank’s governor also suggested that rates might dip lower, thus feeding investment interest for people still hesitant to enter the market. Additionally, the low rates have been planned to remain for a while.
The Impact on Housing Affordability
While even lower interest rates are enticing, it’s quite unlikely that they’ll dip even lower. One of the main reasons is how soaring prices aren’t good news for everyone. While property owners benefit from them, the affordable housing opportunities have taken significant hits.
However, not everyone agrees with interest rates being the main factor behind rising prices. Other experts have stated that lower supply is actually a problem, and has been for a while.
Fiscal policy has been another suggestion to correct prices. Other experts point out that the government could stimulate housing supply via social housing and tax reforms.
Rates Aren’t Likely to Decrease Amid Tensions with the Government
The main clash is definitely behind the Reserve Bank and New Zealand government. It’s basically a two-sided battle between monetary or fiscal policy changes. Grant Robertson (finance minister) has suggested that raising interest rates might be the ideal solution.
Therefore, interest rates aren’t likely to go lower. The result would be increased tensions over higher house prices because of market demand. Because of these clashing opinions, interest rates are likely to remain the way they are instead of moving either way.
What do we Think?
As the article mentions, the tensions between the Reserve Bank and the New Zealand government are the most important factor when assessing where the market could go. The result of these debates could tip the balance towards higher interest rates or fiscal policy changes.
However, New Zealand might still pose a prime investment opportunity amid rising prices. With inflation projected for the long-term, returns might be promising despite the low yields.
With that in mind, the best approach is to stay on top of the most important news for the real estate sector. That’s why we invite you to subscribe to our newsletter. We curate the most relevant information for your business decisions, so all you need to do is read.