In a surprise move, last month the Reserve Bank of NZ announced it would look at reintroducing its LVR restrictions on banks from March 2021 – two months earlier than expected.

The reason is simple: Not only did the property market withstand the impact of Covid-19, but house prices in many regions kept on rising, in some cases even hitting record highs. By reintroducing LVRs, the Reserve Bank is looking at putting a lid on higher-risk, low-deposit mortgages, particularly for investors. The question is, how will this impact the property market in 2021?

Of course, we have no crystal ball to rely on. And in these unprecedented times, even economists’ crystal balls seem as cloudy as anyone else’s. But we can take a closer look at the key factors that fuelled the property market this year, and hear where they might go next.

Reserve-Bank enforced LVRs

According to most economists, the temporary removal of RBNZ-enforced loan-to-value restrictions since April 2020 has played key role in pushing prices up. The Reserve Bank itself has acknowledged that the market has heated over the past few months, with a “rapid growth in higher-risk investor lending.”

It’s important to note that house price and sales volume increases happened despite rising unemployment. According to Real Estate Institute of NZ chief executive, Bindi Norwell, buyers’ “fear of missing out” has played a key role: “This is just not what anyone expected to happen and shows just how much people’s concern around future price rises is adding to their determination to buy now before prices potentially rise even further.”

A survey conducted by REINZ in November found that 88 per cent of buyers surveyed had a fear of missing out as rising prices put home ownership further out of reach. Theoretically, the reintroduction of LVRs by the Reserve Bank may add to the ‘FOMO’. But most banks are already reinstating LVR restrictions and requiring investors to have at least a 30 per cent deposit rather than 20 per cent.

Some experts don’t believe the return of LVRs will rein in a heated market. “The reality is there were plenty of signs the housing market was really starting to heat again early this year just before everything went Covid crazy,” wrote David Hargreaves on interest.co.nz. And one of the reasons is, lower-than-ever mortgage rates.

Mortgage rates

House price forecasts have changed widely over the past few months, but at the time of this writing, Westpac analysts expect prices to increase by 15 per cent by mid-2021. Similarly, Kiwibank is forecasting a 13 per cent rise by mid-2021.

Interest rates are a key factor to watch. It’s not yet clear if the Reserve Bank will lower the official cash rate (OCR) further, which would add to the downward pressure on mortgage rates. Regardless of that, mortgage rates seem unlikely to increase in the short term.

ASB economists, for example, expect mortgage rates to fall to around 2 per cent, or possibly a touch below it, over the year ahead, with all fixed terms staying at or below current levels for the next two years.

The bottom line is, at some point the OCR is likely to increase again, and mortgage rates will rise accordingly, which may cool off the market. When, is the question. Some economists (like Westpac’s Dominick Stephens) expect a decline in house prices from 2024. Others, like Kiwibank’s Jarrod Kerr, expect the rapid expansion of the property market to slowly ease into 2022, mainly due to LVRs.

Returning Kiwis

New Zealand’s lack of housing supply is anything but a secret, and returning Kiwis may add further pressure to it.

According to a recent survey by the Kiwi Expatriates Association (KEA), more and more New Zealanders are considering returning home and being part of the recovery. Half of all 15,000 expat Kiwis surveyed were planning to return, with 24 per cent of them looking at returning home in the next 12 months, and the remainder within four years.

Interestingly, the majority of respondents were looking at moving to regional New Zealand. This could affect the property market in those areas, boosting buyers’ competition. Just how big an impact, it’s too early to tell. All we know is that, amongst those who have recently returned or plan to do so in the next couple of years, 62 per cent planned to buy a residential property.

We’re here to help – now and in the future

There’s obviously a lot to unpack here, and only time will tell how the market will fare over the year ahead. But one thing is certain: We’re in your corner. Whether you’re planning to make a property move or would like to make the most of low interest rates, we’re just one phone call away.

Enjoy a restful break – we look forward to hearing from you in the new year.

Disclaimer: Please note that the content provided in this article is intended as an overview and as general information only. While care is taken to ensure accuracy and reliability, the information provided is subject to continuous change and may not reflect current development or address your situation. Before making any decisions based on the information provided in this article, please use your discretion and seek independent guidance.