Outlook For Housing In 2019 Stable But Not Without Risks

Peter Thompson, Managing Director, Barfoot & Thompson
Outlook For Housing In 2019 Stable But Not Without Risks

The country’s current economic performance and the latest data for residential house sales indicate to me the Auckland housing market is in for a stable start to 2019.

The latest national sales figures released by the Real Estate Institute mirrored our own sales data for Auckland, released at the start of the month. These were sales numbers rising significantly and prices increasing modestly.

In the case of Auckland data, our average price showed a year-on-year increase of 2.9% and for the median price an increase of 3.6%. Compared to the majority of other regions, Auckland’s rise was modest.

Auckland prices had been marking time for about 12 months and have only shown signs of modest increases in the past two months.

While welcomed, these increases are not a signal that prices are going to continue to rise. However, it does re-enforce the conviction that prices are unlikely to decline.

It is yet another signal that Auckland has achieved a soft landing from the nine-year-long price increase cycle.

This represents good news for the rest of the country which has yet to see the end of its cycle of price rises, which started some years after that of Auckland.

There is a good chance that other regions will follow the pattern established by Auckland and achieve a soft landing, and then see prices consolidate rather than decline.

Some commentators are pointing to the significant decline in house prices in centres such as Sydney, Melbourne and Vancouver as a potential warning as to what might happen to house prices in New Zealand.

While there is always a possibility that prices might decline locally, when you look at the core drivers of our market a price decline has to be the most unlikely of outcomes.

Mortgage lending rates are likely to remain at historically low levels well into 2020, economic growth is predicted to be solid, employment levels are at record highs, immigration continues to see the population growing, the pipeline of new builds reaching the market is positive and there are even indications that the Reserve Bank is considering lowering the deposit requirement from 20% for the bulk of trading bank mortgage lending.

On balance, I see the most likely trading pattern for 2019 as prices continuing to move in a tight band around current levels with sales numbers increasing moderately.

While some vendors and buyers may be disappointed that windfalls may not be in the offering, for the majority a continuation of the current status quo will be a welcomed outcome.

In 2019 I anticipate the biggest debate around housing will be whether the Government will introduce a capital gains tax on non-family homes.

Within that debate I hope that decision makers do not lose sight of the likely impact such a tax is likely to have on residential rental rates.

Of those that rent, 84% (Stats NZ,2013 census) rent from private landlords.

Contrary to the perception of most, the rents being paid by tenants in Auckland, based on the value of properties, is modest – gross returns being between 3% and 4%. This is markedly lower than the return that can be made on commercial property.

Without doubt, a contributing factor to many landlords being prepared to live with such a gross return is the prospect of a tax free capital gain when they sell their asset.

Remove that benefit, and many landlords will focus on getting a better operating return on their rental property – which will be detrimental to the tenant.

Rather than demonising private landlords they need to be viewed as part of the solution to housing the country’s population.

While it can be argued that investors in residential property may not need tax breaks, there is no logic to requiring them to face additional tax impositions that ultimately will lead to tenants paying higher rents.

 

Peter Thompson

Managing Director, Barfoot & Thompson

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