New Zealand housing market close to 'significant turning point' after Government's investor crackdown - CoreLogic report

New Zealand's overheated housing market could be close to a "significant turning point", with the Government's investor crackdown earlier this year finally translating to an easing of demand and sales.

Real estate data company CoreLogic released its latest Property Market and Economic Update for the second quarter of 2021, finding evidence house price growth could be set to cool.

The report shows after a hot start to the year, sales volumes have now eased to the same levels as 2019 and demand has cooled too. 

Monthly gains are also slowing, with a drop in market share for mortgaged investors and a noticeable uptick in the number of first-home buyers entering the market.

CoreLogic says a host of changes affecting investors - affordability pressures, the 40 percent deposit requirement, bright-line test extension, a tightening of interest deductibility rules and potential debt-to-income restrictions - are behind the fall in demand.

And it's predicted impending monetary policy changes will dampen the market more, with the Reserve Bank anticipated to increase the official cash rate (OCR) at some stage soon.

There's a drop in market share for investors but a noticeable uptick in first-home buyers.
There's a drop in market share for investors but a noticeable uptick in first-home buyers. Photo credit: CoreLogic

While the OCR didn't change as some expected last week, major banks still announced their fixed-term mortgage rates would rise - a move that will impact new borrowers.

CoreLogic says further mortgage rate increases are likely.

"Last week's rate rises will see an average new borrower fork out an extra $1800 a year in interest repayments, but should rates continue to rise to their long-term average, that same new borrower could be paying an extra $19,000 a year," CoreLogic says.

Kelvin Davidson, CoreLogic's chief property economist, says those who entered the market after 2014 - the last time the OCR increased - have only experienced low interest rates and could be in for a nasty surprise when the OCR lifts again.

"The effects of a pattern of increases will likely come as a shock to many of those with a hefty mortgage, which includes many who have bought recently in Auckland and Wellington, the most expensive markets," he explained.

"For those still trying to buy their first home, interest rate increases will raise the bar to entry."

Davidson warns an OCR increase would directly impact real estate, and "with borrowers already seeing mortgage rates increase, and from a low base for rates as well as larger debts, that could have quite a strong dampening effect on the market".

"On the whole, these events reinforce our view that sales activity and price growth are close to or at a peak and over the coming months sales activity and the pace of value growth are likely to ease," he went on.

"That is simply reinforced by the fact that the Government's tax changes at the end of March, while not having a major impact yet, will start to have a greater effect as the months pass and the ability to claim interest deductions is slowly phased out for current landlords.

"However, with unemployment low and in the absence of a Global Financial Crisis-style credit crunch, a full-on property downturn seems unlikely."