Economists warn three factors to weigh on housing market in 2019

Economists are warning of three major factors that could influence New Zealand's housing market this year.

The foreign buyer ban, the possibility of the Government axing landlords' tax deductions, and the introduction of a capital gains tax are all areas of concern for 2019, they say.

Economists at Westpac and ANZ both cite those three factors that could impact the sector and even the head of Auckland's largest real estate agency is talking of the possibility of a "slight correction".

Dominick Stephens, the Westpac economist writing in the November 15 Home Truths, gave a bearish long-term outlook due to these three factors.

"We do believe that the ban will have a bearing on house prices eventually. Next year the market will be impacted by changes to the rules around tax deductions for property investors. And if a capital gains tax is introduced, the impact on house prices will be large," Stephens said.

The foreign buyer ban came into force in October last year.

The Government wants to stop landlords claiming tax deductions on rental property, leading to an outcry from the Property Investors' Federation. It wants to remove a tax loophole where investors with loss-making rental properties can subsidise part of the cost of their mortgages through a reduced tax on other income, helping them to outbid owner-occupiers for properties.

In a separate tax reform move, capital gains tax has long been on the horizon. The Tax Working Group's initial recommendations were released in September.

CoreLogic said 25 per cent of November's residential property purchases throughout New Zealand were made by multiple property owners with a mortgage.

ANZ's housing market outlook, released in early December, cited concerns about precisely the same three factors as Westpac.

"The headwinds of tax changes, tougher landlord responsibilities and the foreign buyer ban are finely balanced with very low mortgage rates, improving credit availability, and still-strong population growth. All up we see the housing market remaining contained," it said, referring to loan to value restrictions.

The Auckland housing market was "behaving itself but history warns against ever ruling out a second wind", ANZ noted.

Peter Thompson, Barfoot & Thompson managing director, reckons Auckland prices will be much the same in 2018 but is also somewhat bearish in his outlook.

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"There is a chance we could see a slight market correction as it is becoming more of a buyers' market rather than a sellers' market compared to this time last year. Days on market is lengthening and more sales are conditional on attaining finance from their banks," said Thompson, whose business sells more than 40 per cent of Auckland homes.

Open home numbers dropped around November "but indications are that those attending have done their homework and are interested in buying, However with a strong economy still in demand, interest rates remaining low, building consents slowly increasing and development of new apartment blocks and new projects coming on to the market, choice is the word at this time," Thompson said.

In an economic report in late November, ASB said New Zealand residential property price movements tend to broadly track those in Australia. Australian house prices are around 3 per cent off their October 2017 peak.

Yet Sydney prices more than 7 per cent below the June 2017 peaks, while Melbourne prices are around 5 per cent lower, ASB said.

"Given the falls evident in Australia, the concern is that similar weakness could be evident across this side of the Tasman and that overall NZ house prices fall," ASB noted.

But New Zealand house prices are still going up, albeit modestly, even though there have been modest falls in Auckland house prices since the start of the year, ASB noted.

The Reserve Bank appears far less concerned about our housing market now than it has been in recent years. Although house prices remain high compared to incomes and rents, escalation has waned since early 2017, it says.

Credit growth to households has returned to more sustainable levels. Banks are also more rigorously assessing customers' ability to service their loans. This means a gradual reduction in the risks which the LVR restrictions were designed to mitigate. And housing market pressures are expected to remain subdued, which will further reduce risks over time, the Reserve Bank says.

REASONS TO BE BULLISH ON 2019 MARKET:

• Historically low interest rates, which might stay for two years;

• Low unemployment giving job security, and mortgage repayment confidence;

• LVR restrictions easing after five years, resulting in more buyers;

• Prices have not been rising as fast as previous years, market more stable.

REASONS TO BE BEARISH ON 2019 MARKET:

• Foreign buyer ban potentially removes buyers from market;

• Tax changes for landlords, removing ring-fencing, could mean fewer sales to investors and them dumping properties onto the market;

• Capital gains tax potentially on the horizon could depress prices;

• House prices are still high compared to incomes and rents.