In my last two monthly columns I have made reference to the very uncertain times which we are living through and how one would be very unwise to place a high degree of faith in a particular set of interest rate forecasts proving accurate.

Last month I noted the surprisingly strong inflation number released in the middle of July. Shortly after sending that article out we received news of a surprising fall in the unemployment rate right back to the 4.0% it was at ahead of last year’s lockdown.

Now, we have additional new information to digest. But instead of accelerating the pace and increasing the magnitude of the interest rate rises outlined by the Reserve Bank in May, it has slowed the process.

The country has gone back into lockdown to fight the Delta variant of Covid-19 and again we are seeing a negative impact on the New Zealand economy. But will things be as bad as they were during the seven locked-down weeks of last year, and will the bounce on the other side be as strong? In particular will we see another version of house prices on average falling 3% and then soaring over 34%? No.

This time around our attitudes and fears are sharply different from last time. We have adjusted our businesses to better handle lockdowns (though for some this is not possible), and we have knowledge of what happens when lockdowns end. We catch up on spending delayed using money saved up and because we are intent on reclaiming our lost consumer enjoyment. Revenge spending some have called it.

The reduction in spending this time per week will probably be similar to last time. But indicators and anecdotes so far for the housing market are less negative than back then and I have measures of many of them in the monthly survey of real estate agents which I run with REINZ.

In the first lockdown a gross 35% of agents said they were seeing FOMO - fear of missing out. That is a very low reading. This time the measure is 71% - the highest since 76% in March this year. Last lockdown a net 17% of agents said that prices were falling in their location. Now, a net 59% say they are rising.

In lockdown last year 50% of agents said that a shortage of listings was the big concern of buyers. Now 79% say it is. Back then 48% said buyers were worried about their incomes. Now only 12% cite that as a major concern.

These and many other measures tell us that through lockdown the real estate market is likely to remain strong. In fact, heading into lockdown there were improvements for almost all of the measures which I track from my various monthly surveys of agents, mortgage brokers, and people generally.

Thus, even if Auckland should experience an extended Level 4 lockdown, house prices are likely to hold up, especially as the already severe shortage of vendors may be aggravated by some choosing to hold their properties back in anticipation of a repeat bounce.

But it pays to note that aside from these specific market dynamics, there are other factors which suggest the market will not surge, much as the approach of Spring is likely to produce increased activity and prices.

First, there is no fresh 0.75% cut in interest rates as happened last year. Instead, the Reserve Bank has clearly indicated that it plans raising interest rates and has merely delayed the increase because of the timing of lockdown being announced less than 24 hours before they were due to give their update.

Second, there is no removal of Loan to Value Ratio restrictions as happened last year. Instead the minimum deposit for investors is now higher than it was ahead of last year’s lockdown at 40% from 30%. In addition, banks are having to halve the amount of low deposit lending which they can undertake.

Third, average house prices are 31% higher than in February 2020. Affordability is a problem for many buyers, effectively taking them out of the market.

Fourth, the level of buying from investors has fallen away since the March 23 announcement on tax changes affecting property investors.

Fifth, the Reserve Bank is being given new weapons to use against borrowers – investors in particular one suspects. They will within a month be able to apply debt to income (DTI) restrictions, set the maximum ratios banks can use for debt servicing as a proportion of income, and enforce minimum interest rates to use when calculating debt servicing costs.

Sixth, and related to this point, the Reserve Bank is now officially required to consider the impact of its policies on the government’s goals of dissuading investors from buying existing properties and improving sustainable house prices. The Reserve Bank Governor has already stated that he feels prices are above their sustainable levels.

Seventh, the government will be well aware of what happened with house prices the last time lockdown ended. My strongly expressed view has been that if house price inflation is above 10% come the March quarter of next year, the government would be highly likely to double-down on its March 23 tax changes. Perhaps they would remove ability to deduct other expenses when calculating taxable rental property income.

If the lockdown or ending of the lockdown brings a fresh market surge, any new tax change could come this side of Christmas.

Listing reasons why the pace of house price inflation will slow is relatively easy. But we should not forget that there are some big factors in play suggesting the pace of rise will nonetheless remain firm for the next 6-12 months. One factor is that it may take some time for the Reserve Bank’s interest rate increases to affect the bulk of borrowers. Another is that the number of properties listed for sale is now almost 30% below levels pre-Covid.

There are also firmly rising construction costs to consider, shortages of sections, and growing frustration by people trying to get a property built which is causing many to switch back to looking at listings of existing properties.

Uncertainty regarding how quickly house prices rise on average when lockdown ends is high, just as uncertainty is also high regarding the speed with which house price inflation adjusts to the growing number of other factors coming into play.

​The period of greatest house price increases has been and gone and one way or the other, the pace of growth is going to slow in the next 12 months, with a period of flattish prices on average after that, assisted by net migration numbers turning negative and house supply booming.

For investors with a long timeframe and who have not relied upon high debt, this will pose few problems. But there might be some who have paid a lot recently and geared to the hilt, who could struggle should interest rates in particular rise 0.5% - 1.0% more than the 1.75% pencilled in by the Reserve Bank.

Go to www.tonyalexander.nz to subscribe to my free weekly “Tony’s View” for easy-to-understand discussion of wider developments in the NZ economy, plus more on housing markets.

By Tony Alexander

Debate has now lifted to a high level regarding central banks around the world pulling back from extremely loose monetary conditions put in place to fight the effects of Covid-19. We can see evidence of economies growing quite strongly now with support not just from low interest rates and printing of money.

In the likes of the United States and United Kingdom there is confidence returning as vaccination rollouts proceed rapidly, plus in the US a large fiscal stimulus is underway with more to come. In China factories are busy producing the many goods householders around the world have been binging on since Covid appeared.

In Australia there is no vaccination boost evident yet and clearly the Delta variant of Covid-19 is causing problems. But there is a fresh fiscal stimulus in play and strong growth occurring in the minerals sector thanks to strong demand for the likes of iron ore coming from China. The rains have fallen in eastern states, so the farming sector is looking good, and there is a house building boom underway.

The appearance of better growth and lifting of growth forecasts has shifted attention to the risk of inflation rising and already we can see a headline rate in the US of 5%, and one measure in China hitting 9%. Every week brings new price increase announcements from suppliers of building materials, and tight labour markets are starting to cause wages growth to accelerate – most notably in the United States.

Here in New Zealand we are likely to soon see the annual rate of inflation rise from 1.5% to close to 3% and though there are many temporary factors which will explain the increase, there are plenty of indicators suggesting inflation may prove less sanguine than desired.

For instance, in the ANZ’s monthly Business Outlook Survey a net 63% of businesses have said that they plan raising their selling prices over the next six months. The average for this measure is 22% and the latest reading is the highest on record.

We can also see tightness developing in the labour market and that is important in two ways. First, labour shortages will eventually boost wages. As yet one cannot see this effect showing
through and that is perhaps understandable as many employees still feel very uncertain about
the future as Covid-19 remains a problem.

But perhaps the greatest relevance of the tightening labour market is that it means the Reserve
Bank is very close to satisfying the requirement under its Remit from the Finance Minister to try
and achieve sustainable maximum employment.

The need to maintain extraordinarily loose monetary policy to contain unemployment has almost vanished and that is a key reason why the financial markets have now fully priced in an
expectation of the Reserve Bank raising its official cash rate from 0.25% come February next
year.

That timing is six months in advance of the indication which the Reserve Bank recently gave of
tightening starting just after mid-2022. But since they published that interest rates track, we have learnt that the NZ economy grew by 1.6% during the March quarter of this year and did not shrink 0.6% as the Reserve Bank had predicted.

How high might interest rates go? The Reserve Bank have pencilled in 1.5% worth of rate rises
stretching over a two-year period. Those rises would represent an unwinding of the 1.5% worth
of rate cuts between May 2019 and March last year. But there is a risk they need to raise rates
2% given the way in which the labour market is set to tighten up in New Zealand.

The government has clearly indicated that they are adopting more of a fortress New Zealand
approach to immigration policy than a focus on boosting the pace of economic growth. Their
concerns about some groups in society potentially failing to keep up because of competition for
work from low skilled migrants on working visas is driving a focus on effectively forcing
businesses to hire Kiwis – no matter how low skilled they may be. There are merits to such a policy. But there is a cost which will be borne by the business sector and that risks higher selling prices to recoup higher labour costs.

In addition, there is very strong demand coming out of Australia for New Zealand staff. Australian employers are desperate for people across a very wide range of sectors and New Zealand is the only pool they can fish in with reasonable expectation of new hires being able to start almost immediately. The rest of the world is still largely denied entry through Australia’s quarantine system – to a deeper degree than is the case in New Zealand.

As Kiwis head across the Tasman we can reasonably expect additional upward pressure on
wages here. But does this mean a severe rise in inflation lies ahead and that we should expect
interest rates to rise a lot more than 1.5%? Not really.

Back in 2008 when interest rates were last at high levels at the end of a 3.25% tightening cycle
(peak cash rate of 8.25%), the level of mortgage debt in New Zealand stood at about $150bn.
Now it stands near $310bn and allowing for principal repayments, sales and purchases by
existing borrowers, maybe 80% of the debt is new in the sense of borrowers having no familiarity with the old, high, mortgage rates which we used to have in New Zealand.

This means that when mortgage rates start going up, we are likely to see a fairly strong pullback
in spending by borrowers which means rates won’t have to move all that far for the Reserve
Bank to get the restraint which it will need on our pace of economic growth.

Could rate rises cause big problems in the housing market? Probably not. The days of
irresponsible mortgage lending in New Zealand disappeared a long time ago, and for some years
now banks have assessed the ability of borrowers to service their mortgage at rates around 3%
higher than what they actually signed up to.

This is good news for the business sector in that financing costs this cycle will go nowhere near
the levels of past monetary policy tightening cycles. But it is very good news for exporters
because the absence of extreme hikes in NZ interest rates means the absence of the large cash
inflows seeking high yield which have characterised past tightening cycles. This effect will in particular be dampened by interest rates offshore rising perhaps not long after they have started to be pushed higher here by our central bank.

These are extremely uncertain times which we are living through, and no-one should be under
any illusion regarding the accuracy of interest rate predictions which we economists are making.
After all, most of our forecasts have been wrong since 2007 with regard to first of all not picking
the GFC, then second continually over-estimating inflation and interest rates from 2010. The
trouble is we’re not sure which way the errors will lie this time around. Will we under-predict rate
rises or over-predict? Time will tell.

Go to www.tonyalexander.nz to subscribe to my free weekly “Tony’s View” for easy-to-understand discussion of wider developments in the NZ economy, plus more on housing markets.

By Tony Alexander

It would be good to be able to say that things are settling down now in the world economy and our own, and that we can make some reasonably robust predictions as to where interest rates might go and therefore perhaps the housing market. But with Covid-19 spreading in India, Taiwan and Singapore and causing new problems in Victoria, we remain in a world of high uncertainty.

However, just because there are some clear negatives still around does not mean one has to adopt a negative outlook for growth if there are other factors which are strongly positive. In the case of our economy there are, and this has some strong implications for interest rate risk management and eventually the housing market.

When we economists consider the outlook for the New Zealand economy our starting point will almost always be the prospects for growth in our export markets. That is because about one-quarter of expenditure in the NZ economy derives from export sales and we can often see some big changes in income for our export sector.

Clearly, in the tourism sector the level of income is miniscule and unlikely to become robust again until our borders open up – perhaps from the middle of next year. But for our primary sector exports such as red meat, dairy products, seafood, horticultural products, forest products and so on, conditions for most currently are good and look set to get better, our export prices are sitting about 16% higher than they were on average at the end of 2019, and Fonterra have recently announced their highest ever starting payout projection for the coming season. The positive outlook for our export receipts and therefore the likes of the farm servicing sector and the regions stems from accelerating growth in countries such as the United States, Australia, the United Kingdom, and China.

The driving forces vary from one country to the other. In the US and UK successful vaccination campaigns are a key positive and in the US a huge fiscal stimulus is underway. In China factories are running flat out making the many consumer goods the rest of the world is demanding in place of spending on international travel.

In Australia there is strong growth underway in sectors like house building, infrastructure, mining, farming, and various care sectors such as health, early childhood, and the aged.

The second thing we economists look at when assessing our growth outlook is household spending. This typically makes up about 65% of our economy and although it is bigger than exporting the direction of influence tends to run from exports to households and not always the other way around.

There is very strong demand for staff across virtually all sectors and all parts of the country both now and anticipated for the future. That means not just increased household incomes from more people in work, but higher willingness to spend from good job security as well as eventual faster wages growth.

People will also feel happy to spend from the average 26% increase in NZ house prices over the past year. Plus, there is about an extra $10bn sitting in our bank accounts at the moment than what would otherwise have been the case without Covid-19. This will help keep spending up even as we eventually start pulling back from buying more spas and adding more rooms to put money aside for overseas travel again one day. The third thing to look at is what we generally call capital expenditure. This covers things like house building, purchases of machinery and computer systems by businesses, infrastructure development, and commercial construction.

In all of these areas prospects for growth are strong, especially for house building where construction is almost running at the highest level compared with our population since 1975. There is clearly a lot of spending to occur on infrastructure, and businesses are looking to build more warehouses and distribution centres to handle the need for higher inventories and more online retailing.

The interesting factor here is business spending on labour-saving machinery and technology. This has tended to be an area of weakness in New Zealand over the long term and one of the likely reasons the government is cutting back on working visas is the observed tendency for businesses to facilitate their growth more by bringing in migrant labour than investing in better systems etc.

The lower average level of productivity and therefore income per capita in New Zealand than the OECD average can be explained to a large degree by too small a capital stock. The next few years then for many businesses will be very challenging because while labour availability is bad now, it is going to get a lot worse.

It is not just that the government is changing the working visa rules. A surge of growth in Australia always drags Kiwis across the Tasman to earn more and build nest eggs of savings which they may or may not return with. The upturns in other countries like the United Kingdom, and United States will have a similar effect of not just encouraging some Kiwis to go offshore, but to dissuade a great number of Kiwis from coming back.

Overall, prospects for growth in our economy look good, the labour market is tightening up rapidly, and that is why the Reserve Bank recently signalled that they anticipate raising their cash rate from 0.25% to 1.75% starting in the middle of 2022. They anticipate rising inflationary pressures and eventually central banks overseas are likely to see things the same way.

But because a tightening of monetary policy in NZ is likely to occur before other countries move, the NZ dollar is likely to generally move higher over the next couple of years.

What impact will rising interest rates have on the housing market? Keeping in mind that a strong economy with sturdy job security tends to naturally push up house prices, rising floating rates from mid-2022 and rising fixed mortgage rates well before then will slow down the pace of increase in prices.

Extra slowing will come from the new tax rules announced on March 23, plus the introduction of a 40% minimum deposit requirement for investors from May 1. There is also strong growth in house supply underway, and the pace of growth in our population risks being a bit less than people have been thinking these past 15 months, once the borders reopen.

The upshot is not that average house prices are likely to fall because that generally only happens when we have a recession. But the pace of growth will slow to perhaps 5%+ in the coming year then slightly less for the 2-3 years after that.

Can we see signs of slowing already? Yes, in that the pace of growth in average house prices nationwide has already eased from 5.3% in February to 2.7% in March then 0.6% in April. The various surveys I run also show that investors have stepped back from the market to wait and see how things develop. First home buyers, taking their cue from these investors, have also stepped back though not to the same degree.

Both the Treasury and the Reserve Bank have recently predicted that house prices will barely rise in the coming year. But they may have an excessive degree of faith in the effectiveness of their recent policy change. Until the second half of next year the floating and one-year fixed rates which people largely still borrow at will remain near their record lows. And although there are plenty of other things which people can invest in, none of them will be done with a bank lending an investor 3-4 times their capital in order to do so. Housing is the only investment banks will willingly help someone gear into.

Go to www.tonyalexander.nz to subscribe to my free weekly “Tony’s View” for easy-to-understand discussion of wider developments in the NZ economy, plus more on housing markets.

By Tony Alexander

A key determinant of where the New Zealand economy goes is the pace of growth in our main export destinations. If they are doing well we tend to see more tourists come our way (when borders are open), commodity prices tend to go up, and the overall volume of sales of our commodity exports rises as well – subject to the weather permitting good production levels.
 
In our biggest export destination, China, growth of about 8.5% is commonly expected this year. This arises not because of a successful vaccination rollout, given the low efficacy of the Chinese vaccine, but because outbreaks were brought under control quickly and because the rest of the world’s consumers are spending heavily on many goods made in China.
 
This is where the problem with container location comes into play. Shops outside of China are struggling to get the goods they have ordered because the containers which would normally have been recycled back to China after being emptied in the past are often still sitting in Western and other countries.
 
Until this situation changes – perhaps by the end of the year – shoppers can expect continuing shortages of some products and businesses will lack timely delivery of key inputs into their production processes.
 
The strong growth in China is helping push up prices in particular for New Zealand dairy and forestry products with the result that on average all of our export prices in March were 14% ahead of their levels at the end of 2019.
 
The United States accounts for just over 10% of our exports and their economy is expected to grow 6.5% this year and 4.5% over 2022. This reflects the strong rollout of vaccines, catch-up spending, continued very low interest rates, surging house prices (up 12% in the past year), and a very strong fiscal stimulus from the Federal government.
 
Australia takes around 14% of what we export – though mainly manufactured goods – and over the Tasman consumer confidence is at an eleven-year high and business investment intentions a 27-year high. One interesting dynamic there is a surge in house building caused by over 115,000 people signing up to receive a $25,000 grant to assist with getting a new house built.
 
Already I have received feedback of Kiwis being headhunted to work in the new home sector in Australia as demand for building and outfitting staff is extremely high. This drag of Kiwi tradespeople and labourers across the Tasman will impede the speed of growth in NZ house construction over the next three years, cause some frustrating delays for builders and buyers, and push up overall construction costs.
 
The UK only takes about 2.5% of what we export. But their outlook has improved tremendously in recent weeks as a result of the rapid vaccine rollout. Hopes are high in government quarters and amongst some exporters for a free trade deal to be signed with the UK soon. But as the media have recently noted, there is the usual pushback by the still inefficient farming sector over there and this means gains to New Zealand’s primary producers when a deal does eventually get penned could be a tad limited.
 
Will the firm growth overseas propel the NZ economy forward at an especially rapid pace? No, but prospects nonetheless are good. There is a key factor which will limit the speed of recovery here over the next couple of years. Labour is in short supply in New Zealand.
 
The recently released ANZ Business Outlook Survey tells us that early in April a net 16% of businesses were planning to hire more people over the coming year. This is the highest proportion since 2017 and well above the ten-year average of 5%.
 
But of greater interest perhaps are these numbers from the NZIER’s Quarterly Survey of Business Opinion. In the March quarter a net 49% of businesses said that they were finding it difficult to source skilled labour. This was above the 37% ten-year average and the highest reading in two years. A net 27% said they are finding unskilled labour difficult to source and that is the highest reading since just before Covid-19 struck and well above the 16% average.
 
But the really interesting statistic from all of the surveys is this. In the March quarter only a gross 36% of businesses said that the main constraint on their ability to grow is a shortage of customers. This is down from 47% two years ago and well below the 51% ten-year average. In fact, this 36% reading is the lowest since 1974.
 
Businesses in New Zealand are going to have to make some hard decisions regarding their levels of achievable output given the good demand which is set to strengthen, yet the shortage of people and materials needed to produce their goods and services set to get worse. In fact, the government has stated clearly that when borders properly reopen they will not be issuing as many working visas as before Covid-19.
 
So, businesses will be in a position where they must focus on their highest yielding products, and in many cases will be easily able to raise their selling prices if they choose. This is partly where the risk of rising NZ and global inflation comes from for the next three years.
 
Central banks remain at pains to stress that they intend keeping their official overnight interest rates at current low levels through to 2024. But early signs of inflation are appearing and the markets are highly likely over the coming year to price in monetary policies tightening well before 2024.

In fact in New Zealand market pricing is for the first rise in the 0.25% official cash rate to come before the end of 2022. The Bank of Canada also recently noted that the way the Canadian economy is improving they anticipate meeting the conditions to start raising interest rates from record low levels also before the end of 2022.
 
Well before floating interest rates rise we can expect to see fixed interest rates going up and this is something just starting to happen in New Zealand. Banks are slowly withdrawing their very low medium to long-term fixed housing rates and this is a process likely to continue for the next 2-3 years.
 
How high might interest rates go at their peaks? Frankly, we can only guess as to how inflation develops in a post global pandemic environment. But for modelling purposes I am assuming New Zealand’s cash rate rises 2%, with a high scenario of 3% and low (optimistic) scenario of just 1%.

For most borrowers, the best way to approach their interest rate risk management given the high uncertainties around an upwardly shifting rates track, is probably to take a spread of fixed rates from the one to five-year terms.
 
Email me at tony@tonyalexander.nz to subscribe to my free weekly “Tony’s View” for easy to understand discussion of wider developments in the NZ economy, plus more on housing markets.
 
By Tony Alexander

Late in 2017 Labour won the general election and made many promises with regards to improving many things, including housing affordability. But since September of that year, we have seen these developments.

• House prices on average have risen 32%.
• Rents on average have risen 30%.
• The state house waiting list has grown from 5,000 to 23,000.
• The proportion of dwellings being sold to investors with mortgages has risen from 24% to 30%.

​Housing goals for the government have not only not been met, the starting points for all the things they want to achieve have become a lot worse. Because of this, and the extreme 14% rise in average house prices over the past five months (over 30% annualised), the government has promised to announce a range of measures aimed at curtailing housing demand and boosting supply.

Supply-side policies are likely to be announced in the Budget due in May, but unless most controls are removed on land use it is very unlikely much acceleration in the pace of construction will be able to be achieved.

It is worth noting however that since September 2017 the annual number of consents issued for the construction of new dwellings has risen from 30,000 to almost 40,000. It is on the demand side that the government is likely to continue to focus its attention, despite the fact that all policies which have done so over the past two decades have failed to stop house prices rising strongly. The Budget will likely contain some policies, and in mid-March the Finance Minister will announce something new.

New Reserve Bank Instruction
But already we have seen the Finance Minister attempt to make a big change through issuing a new instruction to the Reserve Bank on February 25. When setting its policies, the Reserve Bank must now take into account the government’s housing policies – specifically around affordability for first home buyers and reducing purchasing of existing properties by investors.

Does this mean higher interest rates? After all, it is largely because mortgage and deposit rates are at record lows that demand for property from investors has surged. No.

The official cash rate will continue to be set to achieve goals on inflation and employment. Responsibility for achieving housing goals will be left in the hands of other tools. Already one of those tools is well known – Loan to Value Ratios (LVRs).

There is a chance the 40% minimum deposit for investors will be lifted to 50% if investor demand remains rampant in the next few months. There is also a chance that new rules on interest-only lending by banks to investors will be introduced.

The Finance Minister has asked the Reserve Bank to give him information on such rules and how they could be restricted to affecting only investors. The Minister has also asked for advice on how Debt to Income rules (DTIs) could be introduced and structured to again affect only investors.

Momentum is Turning
What actually happens and when we shall simply have to wait and see. But one strong rule of thumb when it comes to implementing government policies is that they have their best impact if well explained and if the target is moving in the desired direction in the first place. Momentum counts for a lot – or strike while the iron’s hot one might say – and in this case of the residential real estate market we can see some early signs of things easing slightly.

Each month I conduct a number of surveys of the 18,000 people signed up to receive the weekly Tony’s View publication, and of two subsets in particular. One of those subsets is people that I have been able to identify as mortgage advisers. In the most recent mortgages.co.nz & Tony Alexander Real Estate Survey a net 5% of advisers said that they are seeing fewer investors coming forward looking for advice.

This was a substantial turnaround from a net 24% in January seeing more investor enquiries and the first time that this measure has been negative since the survey started in June last year.

Another subset I survey is real estate agents and in the March REINZ & Tony Alexander Real Estate Survey a net 5% of agents said that they are seeing more investors coming forward looking to sell a property. This is the first time that this measure has been positive since the survey started in June, though the turnaround from a net 2% seeing fewer investors looking to sell in February and 7% in December is not that substantial.

But there are some other measures in the survey with REINZ showing some easing.

A net 15% of agents said that they are seeing more investors in the market looking to buy. This means growth – but the speed of that growth is slowing. In the February survey a net 31% of agents said that they were seeing more investors, in December 45%, and in November 59%.

From the survey we can also see that the speed of increase in first home buyers coming forward to make a purchase is easing. In March a net 32% of agents were seeing more first home buyers, down from a net 46% in February, 50% in December, and 64% in November.

And finally, the survey also tells us that in March, when asked why investors are looking to buy, a gross 10% of agents said they aren’t – that they are instead looking to sell. This was the highest result so far and up from 7% in February and 3% in December.

But we also have the official data on real estate activity released by REINZ telling us of some easing in the speed of growth. During January average house prices around the country increased by 1.3%. In December the rise was 2.2%, and in November 3.9%. The pace of price growth has been slowing for two months.

Further, whereas in November nationwide property sales were 34% ahead of a year earlier, and in December growth was 46%, in January annual growth was only 3%.

None of these measures mean that the market is going backwards. But they do suggest that if the government and perhaps Reserve Bank use the next few weeks and months to mid-year to warn about the need for further easing and the potential for anti-investor policies, the actual requirement for new punitive policies may not be great.

Having said that, as noted above, it would be reasonable to think that if the market is still fairly active mid-year that the 40% minimum deposit for investor buyers borrowing from a registered bank could rise to 50%. And we could easily see some restrictions on interest-only lending to investors. Plus, there is the mid-May Budget to come and that could easily contain an extension of the Brightline test from five years to ten, along with some measures (better understood by accountants than economists) reducing the after-tax returns of investors.

Will any of the measures to come cause house prices to fall on average? That is very unlikely. The Prime Minister last year noted that the constituency for rising house prices is greater than the numbers favouring house price falls. Plus, house price falls tend to be associated with economic weakness and job loss and the government and Reserve Bank will not want to do anything which disturbs the economy’s post-lockdown recovery.

In particular, the government will not want to make changes so drastic as to make people fearful of falling prices because that will cause orders for new houses to decline.

All up, we can see early, tentative, signs that the frenzy in residential real estate activity and prices growth is ending. The government primarily, and the Reserve Bank almost reluctantly, are likely to look to hasten the pullback of investors over the remainder of this year.

Email me at tony@tonyalexander.nz to subscribe to my free weekly “Tony’s View” for easy to understand discussion of wider developments in the NZ economy, plus more on housing markets.

By Tony Alexander