One of the world’s hottest real estate markets tries to cool down

The South Pacific nation’s efforts could offer a blueprint for many other countries facing a similar dilemma in the aftermath of the coronavirus pandemic. A combination of lower rates, economic incentives and changes in buying patterns as people work remotely is pushing real estate values ​​around the world higher, pricing many first-time home buyers.

The problem is particularly acute in New Zealand, where the housing supply has failed to keep pace with population growth over the past decade. According to a property-price index by the Real Estate Institute of New Zealand, home prices have risen more than 30% in the past year.

The country’s home-price-to-income ratio, a measure of affordability, has the highest compared to the long-run average among 30 major economies analyzed by research firm Capital Economics. For each economy, the firm created an index setting the long-term average of the ratio of house prices to income at 100. New Zealand’s score on the index was 178, or well above its long-term average. By comparison, a US score of 93, or just below its average, was the sixth lowest on the list.

Governments have a number of tools to influence real estate prices, including boosting the housing supply through direct investment or changing land-use regulations, restricting mortgage loans, and providing financial assistance to first-time buyers. is included.

Economists and policymakers debate whether central banks should use interest rates to rein in housing prices by influencing the cost of borrowing. Higher rates can make mortgages more expensive and quiet demand for housing, but they can also have unwanted effects on inflation or employment, areas traditional for central banks to focus on.

New Zealand is pulling every lever. In October, the country’s central bank raised its benchmark interest rate from a record-low 0.25% to 0.5%, signaling a higher rate of growth over the next year, as home prices continued to skyrocket. And earlier in the year, New Zealand’s government, in a new move, directed the central bank to consider house prices when making monetary policy decisions, even though bank officials warned that it would have little effect on the market. impact and could lead to lower employment and lower inflation than the target.

New Zealand has also restricted low-deposit lending, a move designed to reduce risky mortgages and reduce the likelihood of a damaging housing market reform, which could destabilize the broader economy. Starting November 1, only 10% of lenders to owner-occupiers can have a loan-to-value ratio of more than 80%, which is less than 20% of the lending approved now. It is working on debt-to-income restrictions as an additional tool.

The government also plans to ease high-density housing construction in cities and limit the deduction of interest cost on residential property investments. The tax changes are intended to curb investor demand for existing residential properties, a dynamic that has contributed to higher real estate prices in the past and made it more difficult for first-time buyers on the property ladder.

Whether New Zealand’s efforts will have a measurable impact on housing prices, without any unwanted economic or social side effects, is not yet clear.

In September, the latest month for which data is available, property prices hit record average levels in seven of New Zealand’s 16 regions, according to the Real Estate Institute. Prices in the country’s largest city, Auckland, fell 4% from August to September, but a Covid-19 lockdown in the city had curtailed buying and selling. The institute said it expects activity to pick up once the lockdown is lifted.

Infometrics chief forecaster Gareth Kiernan doesn’t expect New Zealand home prices to drop anytime soon. He added that all government and central bank measures combined may succeed in slowing price rise, but it still means a dire outlook for first-time buyers.

Demand is also likely to increase, Mr. Kiernan said. The government recently decided to allow residency for thousands of people on temporary visas, which means more people will want to buy homes. And the construction industry is still struggling to build homes fast enough to meet current demand.

Mr. Kiernan said interest rates would need to be raised slightly higher than what is currently expected to bring prices down. In August New Zealand’s central bank projected that the cash rate would reach 1.6% by the end of 2022 and 2% in the second half of 2023.

Even if home prices stop rising, and assuming that income grows at 3% annually, the home-price-to-income ratio will drop to its level in 2000 by 2050. Mr. Kirnan said.

“It’s going to be a very painful living, I think, very difficult for people looking to get into the housing market for a long time,” he said.

Capital Economics, in its recent analysis, expects home price inflation in major economies to naturally moderate in the coming months and does not expect a volatile fall in prices.

However, it said the accident risk has increased in countries such as New Zealand, where affordability was increased even before the pandemic. Other countries in a similar situation include Canada, Denmark, Australia, Sweden and Norway, the firm said.

“We would not say that a home price drop in any of these countries is certain or imminent—some have been glowing red for many years, yet home prices defy gravity,” the economics firm wrote. “But it won’t take long to tip them over the edge.”

This story has been published without modification to the text from a wire agency feed