Proposed Capital Gains Tax puts a dampener on housing

  • House price expectations fell across the country in the three months to April 2019, with Auckland house price expectations turning negative for the first time since 2009   
  • Interest rate expectations reveal most respondents expected interest rates to remain unchanged, or rise, ahead of the RBNZ’s cut to the Official Cash Rate in May
  • On balance, it’s a slightly better time to buy in Auckland, but most have no strong view either way

House price expectations are continuing to slide across New Zealand, with Auckland leading the gloomy outlook, according to the latest ASB Housing Confidence Survey. For the first time since 2009, Auckland price expectations turned negative with a net 12% expecting a decline. With the net balance of Auckland-based respondents now expecting prices to fall, it was also seen as a slightly better time to buy, however, for the most part, respondents were on the fence either way.
"The weak result in Auckland was unsurprising, given the Auckland housing market clearly softened over these months and with the media drawing much attention to weak Auckland housing statistics,” says ASB chief economist Nick Tuffley. 
"Furthermore, since late last year many media commentators have drawn parallels between the Auckland and Australia’s housing markets, highlighting the sharp house price declines in Australia and implying declines can be expected in Auckland.  Nonetheless, we are surprised by the extent of the weak results from the ASB survey,” says Tuffley.
Although the Auckland housing market had softened, Tuffley says the balance of indicators suggest the market was not yet in dire straits, backed up by Auckland’s housing market being undersupplied, in contrast to Sydney's.
The other surprise according to Tuffley was the fall in expectations seen across the country. 
"House price expectations in the North Island excluding Auckland moderated to a net 25% expecting an increase (down from a net 32% in the previous survey).  Meanwhile, South Island house price expectations moderated to just net 18% expecting a house price increase, down from a net 29%.  This is despite most regional housing markets (with a few exceptions) being very tight and recording strong house price growth during the months the survey was conducted," says Tuffley.

Proposed Capital Gains Tax weighs on confidence

The Tax Working Group released its recommendation in late February that a capital gains tax should be introduced on residential investment properties – a plan which was scrapped in late April. The latest ASB housing confidence survey largely captures the period in between these announcements, and the results imply that most respondents expected a capital gains tax on residential investment property would have a fairly material impact on the housing market. 

"Despite the capital gains tax being ruled out, we still expect that many investors may remain on the sidelines this year as investors navigate a variety of recent policy changes that will impact investment property ownership," says Tuffley.

"We will be keenly watching our next quarter’s housing confidence survey to see how much (if any) of the fall in house price expectations is reversed," says Tuffley.

Buyers still on the fence around whether it’s a good time to buy

The majority of respondents remained on the fence when it came to sentiment around whether it was a good time or not to buy with 50% saying it was neither good nor bad. Overall, the net balance was slightly more positive that the previous quarter – up to net 4%. Cantabrians remained the most positive, though this optimism had waned slightly.

"With the housing market in Canterbury heating up and housing market conditions starting to tighten, we were unsurprised to see buying sentiment gradually waning in Canterbury, with just a net 8% seeing it as a good time to buy – down from 12% in January," says Tuffley.

"We are surprised how balanced sentiment remained throughout the rest of the country, where the housing market in most regions is very tight and very hot.  A net 2% of respondents see now as a good time to buy in the North Island (excluding Auckland) and a net 2% see now as a bad time to buy in the South Island (excluding Canterbury)," says Tuffley.

There had been steady improvement in buying sentiment throughout the country over the past year, Tuffley says, despite markets in many regions remaining very competitive and house prices growing strongly. 

"We expect lower interest rates will increase the demand for housing in these areas and for market conditions to continue favouring sellers outside of Auckland, Canterbury, Northland and the West Coast of the South Island," says Tuffley.

Several of the Labour Government’s housing policies had reduced investor demand at the margin Tuffley says, including the Healthy Home Bill, ring-fencing tax losses on rental properties, and restrictions on foreign buyers. He said this would likely impact the Auckland housing market the most.

"We expect the Auckland housing market trends to remain driven by first-home buyer appetite.In Auckland flat house prices vs. growing household incomes has seen an improvement in affordability – albeit from extremely stretched levels. We expect Auckland’s house-price-to-income ratio to continue to gradually fall, with the Auckland market achieving a 'soft landing'," says Tuffley.

The full ASB Housing Confidence Survey for the three months to April 2019 will be available online at www.asb.co.nz  Other recent ASB reports that also include housing commentary can be accessed via a Search page https://reports.asb.co.nz by selecting the keyword 'Housing'.

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