Reserve Bank: ‘The tide may well have turned against housing’

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The Reserve Bank’s chief economist warns of “huge changes” to come in the housing market. Photo / 123RF

Reserve Bank of New Zealand chief economist Paul Conway said the tide may well have turned against housing as the investment of choice for Kiwis.

“Housing market dynamics in the future are unlikely to be the same as in the past,” Conway said in a speech at the National Property Conference today.

“Given how important housing is to our economy and to the national psyche, this will be a huge shift.

“For several decades we traded houses among ourselves at ever higher prices thinking we were creating prosperity. But the tide may well have turned against the fact that housing was a one-way bet for a generation of Kiwis,” he added.

“We must continue to build a new approach to housing and economic prosperity in Aotearoa-New Zealand.”

The RBNZ forecast in May a fall in house prices of 14% between their peak in November 2021 and the start of 2024.

The median house price in the country had already fallen nearly 9% to $840,000 since November, according to May data from the Real Estate Institute of New Zealand.

It was still 2% above May 2021 levels and 35% above what it was in May 2020.

The median price in Auckland is down 13% from its November high of $1.13 million.

The drop in prices coincides with the aggressive tightening of monetary conditions by the RBNZ in an attempt to rein in high levels of inflation.

Increases in the official exchange rate, which are expected to continue, are rapidly driving mortgage rates back up from the record lows they fell to in 2021.

Reserve Bank Chief Economist Paul Conway says housing market dynamics are changing over the long term.  Photo/Mark Mitchell
Reserve Bank Chief Economist Paul Conway says housing market dynamics are changing over the long term. Photo/Mark Mitchell

Conway, who joined the RBNZ in January and gave his first public speech today, said housing was unlikely to remain a ‘one-sided bet’ for New Zealanders beyond the current tightening cycle. of the RBNZ.

“Over a longer period, there’s reason to think that some of the basic market fundamentals that drive sustainable housing prices could also change,” Conway said.

“On the demand side, as the pandemic slowly recedes and restrictions on international travel ease, many New Zealanders are heading overseas in search of new experiences.”

But he said immigration is unlikely to quickly return to pre-pandemic levels, slowing population growth.

“In tax space, the abolition of interest deductibility and the introduction of a capital gains tax on sales of residential property held for less than 10 years – the ‘bright lines test’ – will have bridged some of the gap between the effective tax rate on housing and other asset classes,” Conway said.

“At the same time, town planning rules are becoming more flexible to further unlock the supply of housing.

“The Resource Management Act is being replaced and the National Policy Statement on Urban Development directs councils to remove overly restrictive planning rules and allow for higher housing density, which is a essential part of the solution,” he added.

“In the construction sector, the Commerce Commission is conducting market research to determine whether competition for residential building materials in New Zealand is working well and, if not, what can be done. to improve it.”

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