We’re already in February 2022, which means it’s time to start assessing our current and future real estate strategy. What houses will be more valuable? What will decline in value? What should we look out for? What should we prepare for?
With all the inquiries we’ve been getting from our clients, old and new, we decided to put together this blog post, where we’ll take a look at the most recent Housing Policy and its implications, as well as the OCR (Official Cash Rate) and overall home pricing. We’ve also gotten some information from our brilliant advisors. Here we go!
Housing Price Forecast for 2022
In general, New Zealand has been facing a housing shortage, which means that there are more demands of homes than there is supply. This deficit exists because:
- There aren’t too many homes on the market for people to purchase or rent
- There is a rise in the population, and
- Individuals are starting to move out at a younger age.
House prices are expected to continue to rise, as it’s a common practice when supply and demand determine the price. However, we are experiencing a supply shortage due to factors, such as:
- Land banking
- Lack of construction materials and craftsmen.
There are several other factors that too might influence the housing market.
- Interest rates
- Lending standards
- Economic stability (offshore and onshore)
- The COVID pandemic and public perception
- The role of the media.
Last year, cheaper rates and an aggressive FOMO (Fear Of Missing Out) thought process among people helped in the huge rebound of the market. Save for any exceptional reasons, we believe that the Reserve Bank of New Zealand (Te Pūtea Matua) will not reduce any loan-to-value ratios or lower the OCR any further than it has since COVID has reached our shores. Given how successfully the New Zealand economy has recovered, there is greater optimism this time around, and we believe the market will pick up where it left off, although less quickly than previous years.
So is this a good time to sell your house? Give us a call to find out more about our free valuation process.
Housing Policy Updates
The government’s measures were intended to help first home buyers, but they will let developers and investors enjoy the upper hand. The goal of the policy is to make it simpler for first home buyers to enter the market.
The reform will also encourage investors to buy new construction or off-the-plan houses to rent out since the change in the property tax law does not apply to new residential development.
New housing regulations, such as new tax rules for investment properties, will impact all current investors but may also affect the ‘mums and dads’ more than others. These ‘mum and dad investors’, who usually have one or two rental properties, will no longer be allowed to deduct interest on their borrowing, which will be phased out over a four-year period. Typically, parents acquire property to safeguard their future or to help their children onto the property ladder. As the wealth gap rises, consequences are enormous for future generations. This, unfortunately, makes our 2022 prediction even more challenging.
These new tax regulations include a four-year sliding scale for tax deductions, which will encourage investors to invest in new buildings – with exemptions. With that being said, this may have a negative impact on property affordability for first-time buyers – since investors, developers, and first-time homebuyers will all be competing for the same homes. In other words, housing costs are going to rise!
Scenarios from our financial experts
Let’s imagine your rental income is $700 per week or $36,400 per year.
SCENARIO 1: If your annual costs for a property total is $36,400 and the interest on the loan, the mortgage, rates, insurance, and property management is included, you are cash neutral. Because the revenue is offset by the property’s costs, you pay no tax on it.
SCENARIO 2: If this is an existing property and you are unable to claim the interest on the loan, which is $25,000 a year, you can only lower your rental revenue by the remaining expenditures of rates, insurance, and property management, which in this case is $11,000. You now have to pay tax on a sum of $25,000!
Honestly, it’s not ideal. It only fuels more complications. We completely understand the government’s intention for wanting to tax people in order to improve the economy, but it makes life a little more difficult for those who live day-to-day.
And how about the latest on the OCR change?
The OCR has risen from 0.25% to 0.50%. This is the first time in seven years that anything like this has happened. We can expect the OCR to continue to grow due to inflationary pressures, offshore markets, and other volatility. However, we do not anticipate a rate rise after the recession.
What does the OCR change mean?
It implies a minor increase in the cost of borrowing money. This has a direct impact on the rates that banks offer their customers, as well as the fees that consumers pay when borrowing money from the bank via mortgages, loans, and credit cards. This will have an impact on future borrowers’ capacity to receive loans due to their ability to service them.
People will gradually be motivated to save rather than spend now since they are able to anticipate significant returns on their investments if the OCR continues to rise. But when people cut down on their spending, the economy slows down, and inflation rises.
The Reserve Bank of New Zealand lifted the Official Cash Rate from 0.25% to 0.50% for the first time in seven years.
We know that there’s so much to absorb, but hopefully, you’re up to date for now. It might have been a complicated read, but that’s because the market is wild right now, and we’ve never seen anything like it before.
If you want to know more or need any help with property appraisal, free valuation or renting, feel free to call our experts.