Widespread talk of a looming property market crash seems to have evaporated in recent weeks. In the wake of the Government’s ditching of the capital gains tax proposal and the Reserve Bank’s cut to the OCR, which has prompted even lower mortgage rates, public expectations have become more upbeat.

In fact, the question now being posed is could a market rebound be on the cards? Westpac chief economist Dominick Stephens is an exponent of this outlook. He says that Westpac economists now expect nationwide house price inflation to lift from 2% at present to 7% over 2020.

The cancellation of a capital gains tax combined with lower mortgage rates will be game changing and the combination means the trajectory of the market is going to change accordingly – and immediately, Stephens says.

“Along with improved house price growth nationwide, Auckland prices should flatline this year before rising by 5% next year. At the same time, the premium gap between prices in Auckland and elsewhere in New Zealand is expected to narrow to about 30% above the 1992 level, as compared to the 80% it reached at the height of the boom.”

The latest price data from REINZ supports this view. It indicates that price growth in many regional markets has stepped up again. Around New Zealand house prices rose by 3.2% year-on-year to an average median price of $578,000 in May, as compared to $560,000 in May 2018.

While Auckland saw 1.2% annual price growth, which took the region’s median price to $860,000, it was regional markets that were driving the growth. Eleven out of 16 regions saw strong price growth, with Gisborne leading the way with a huge annual increase of 54.4% in prices.

But the sales data was not as positive. Nationwide, the number of sales in May fell by 7.8% year-on-year while Auckland sales were down by 21.8%. From a regional perspective, there was a 50/50 split with eight regions seeing an increase in annual sales and eight regions seeing a decrease.

REINZ chief executive Bindi Norwell says that it’s actually an improvement, as in April only four regions saw an increase in annual sales. “This suggests that the OCR and capital gains back down may be starting to have some impact on the market.”

Market To Remain In Check

However, the latest QV data stands in stark contrast to the REINZ data. This month’s QV House Price Index leaves little doubt that value growth continues to decelerate nationwide.

It has the rate of annual growth dropping from 6.9% in May last year to 2.3% in May this year and the rate of quarterly value growth falling to 0.1%. This left the average national value sitting at $686,954. At the same time, Auckland’s value growth decreased by 2.1% year-on-year and by 1.4% over the past quarter, leaving the region’s average value at $1,030,439.

Alongside Auckland, the other major centres are now seeing their markets soften. Wellington values have plateaued over the last quarter with growth of just 1.0%, while the rate of value growth in Dunedin has now started to slow with quarterly growth of just 1.6%.

But QV senior consultant Paul McCorry says that many regional centres are still very much in the upward stage of their growth cycle and continue to achieve strong yearly and quarterly value increases.

“These areas, which are generally more affordable such as Whanganui, Manawatu and Palmerston North, continue to attract plenty of buyer demand. Attractive lifestyle regions such as the Bay of Plenty and the Hawke’s Bay continue to post good year-on-year growth.”

Most commentators believe that regional markets are still playing catch-up with the larger markets, but they are not convinced that a strong market rebound is set to unfold. Even Stephens thinks that any price rebound will be temporary.

CoreLogic’s head of research Nick Goodall says that despite the signs of renewed demand for property across most of the country, they are not expecting property prices to soar.

“True, some parts will see continued growth – primarily more affordable towns and cities in regional New Zealand – but with bank serviceability tests remaining stringent and growth in our economy slowing, any price changes will likely be gradual.”

For ASB senior economist Mike Jones, nationwide price growth should pick up to a modest 5-6% annual pace by year’s end, as the market navigates the various cross winds. “Rock-bottom mortgage rates will provide a powerful boost but we expect recent housing policies targeting investor demand to keep things in check. Auckland will remain an underperformer.”

Post-Peak Growth Hangover

Likewise, at the GRA Property Leaders Event in late May, there was a noticeable theme when it came to the outlook for the market. That theme was that the property cycle is on the downward leg, which means price growth is set to be muted going forward.

Kiwibank chief economist Jarrod Kerr told the audience that Auckland prices will fall by around 5-6%. “The regions are still playing catch-up but house prices are likely to be flat going forward. There’ll be a period of consolidation – although that is on the back of employment holding up and no recession.”

In GRA managing director Matthew Gilligan’s presentation, he said that this cycle peaked in 2017 and the market is now in the grips of a “growth hangover”.

“We are now heading to the bottom of the cycle. It will take a few years but expect to see reduced demand, declining asset values, and rents and yields on the rise. That’s because the property market always moves in cycles and much the same thing happens each time. The only question is how long will it all last?”

First up, it’s all about the ripple effect from Auckland, which always leads the way, booming and then declining first. Gilligan says last year the market reached the point where Auckland started to go down and the regions, even places like Tokoroa, started doing much better.

“That means you can make money in the regions right now but often the fundamentals are not that great. It’s necessary to look at the timing of the cycle because it is not about ‘when are prices going to grow?’, it is about ‘what happens when the cycle turns down?’.”

He adds that Auckland is highly unlikely to see the sort of price crash Sydney and Melbourne are seeing. That’s because the supply and demand equation at play in Auckland is very different to those cities where supply far exceeds demand.

“In Auckland we need to build 5,000 new houses a year to keep up with the organic population growth of the city – and that doesn’t even include migration which remains high. We are building more dwellings now but, overall, I think the conditions in Auckland mean a soft landing is likely.”