From hunted to hunters

Investors have been hunted by policymakers, both from the last Government and the RBNZ. Interest rate deductibility, Brightline tests and laser focused LVR restrictions have all targeted investors. Precisely what was not needed with a chronic housing shortage. But now, the hunted will become the hunters, Jarrod Kerr, Kiwibank’s chief economist says. 

Hunters will seek opportunities in a ‘buyers’ market. Interest rates will play a big role. Rates are falling. “The RBNZ’s cut last week was the first in a 12-step walk back to neutral. The true test will come in spring, as the property market thaws out from a cold winter,” he says. 

Although the housing market has seen a sharp correction, and is still struggling to make ground, Kerr says Kiwibank is looking to next year, with rate cuts coming thick and fast.

“The RBNZ will take interest rates from very restrictive levels, to much less restrictive, and possibly stimulatory levels. Interest rates are the biggest driver of house prices.

“Last week’s OCR cut is a gift that will keep on giving. Now that it is out of the way, we’re going to spend a lot more time talking about the magnitude. And it’s the magnitude that matters most. We expect to see twelve 25 basis points (bps) cuts, so 300bps in total,” he says.

“If the RBNZ wants to remove the restrictiveness of interest rates, it needs to go back to a neutral, Goldilocks, not too hot, not too cold, setting.” That Goldilocks rate is estimated by the RBNZ to be about 2.75%, a long way from 5.25%.

Kerr believes it will need to go a little below (2.5%) to get things moving. “Mortgage rates, business lending rates have a long way to go south. It’s the magnitude of rate cuts that impacts business decisions, and household confidence.”

As interest rates fall, investors will be enticed off the side-lines (and out of cash).

“Rental yields are still rising as rents are running at the fastest pace in more than 30 years, while house prices are still falling in (large) parts. And the Government kept its promise to unshackle restraints. The delivered reintroduction of interest deductibility, shortening the Brightline test timeline and possible watering down of the CCCFA will entice investors.

While forecasting is an art as much as it is a science, Kerr says it is more likely there will be house price gains next year of about 6% because the surge in migration and the loss of dwellings at high risk of climate change will only exacerbate the housing shortage.

The Government will play a big role, added infrastructure spend or incentives for new builds will be welcomed and interest rates will play a larger role, from now.