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An easing in house prices is looming as the Government begins to implement sweeping changes affecting mainly foreign buyers and investors.
Westpac’s monthly housing report cautions the "good times" for the market are going to end shortly, albeit house price declines are expected to be slight rather than dramatic.
Westpac chief economist Dominick Stephens said while the housing market had slowed in early 2017, it had since been positive, with brisker price increases and market turnover "slightly faster" and in "broadly positive territory".
"The market has become more positive due to an easing in financial conditions, when banks began reducing mortgage rates independent of the official cash rate (OCR), and in January the Reserve Bank eased its loan-to-value ratio (LVR) mortgage lending restrictions," Mr Stephens said.
Those conditions may have also had an element of buyers "rushing in" to beat upcoming government changes to tax and regulations, he said.
Separate data from Quotable Value and the Real Estate Institute of New Zealand have shown plenty of easing in value and prices in Auckland this year, but many regional areas were up in prices by 5%-15% year on year.
Mr Stephens said the "good times" were going to end very soon and he was predicting a small decline in house prices during the second half of this year.
Looking at what might affect the market during the next year, Mr Stephens said there was "a lot lined up on the negative side of the ledger" and not much on the positive.
"This [list] is a prodigious set of negative factors, but for a few reasons we are forecasting only slight house price decline, rather than anything dramatic," he said.
The most important determinant of year-on-year changes to house prices was mortgage interest rates.
"Lower mortgage rates make property investment more attractive and home ownership more affordable,’ Mr Stephens said.
New Zealand was now in an environment of rising global interest rates, and over coming years long-term mortgage rates would be swept higher, he said.
Economic inflation data last week — with the inflation rate still less than half the Reserve Bank’s target range of 1%-3% — had economists still picking no change to the interest-driving official cash rate until the middle of next year.
The bright line test was brought in in 2015 and required people to pay tax on capital gain if they resold their investment property within two years.
"The bright line extension to five years will be a very significant change for investors, and can be expected to negatively impact prices, at least for a short period," Mr Stephens said.
He said that in 2009, Westpac analysed the potential impact of a 10% capital gains tax, excluding the family home, and concluded it would reduce house prices by 15%.
He said because the Government had indicated it would not introduce that tax before the next election, there was considerable political uncertainty.
"The increasing risk of a capital gains tax will surely affect sentiment in the market over the coming years," Mr Stephens said.
Foreign buyers would probably be banned from the middle of this year and that was expected to have a "one-off impact" on price levels, he said.He cited Toronto, where a 15% stamp duty was levied on foreigners and house prices fell 6% in the following six months.
Mr Stephens said the current practice of "negative gearing" by investors/landlords would be phased out or removed from next year.
"This will reduce, but won’t eliminate, the tax advantage property investors have over first home buyers and over other forms of investment," he said.
"Currently, when landlords pay more in mortgage interest and expenses than they receive in rent, they can claim tax losses that reduce their overall tax bill," Mr Stephens aid.
Mr Stephens said migration was slowing and the construction sector was picking up.
"This will eventually start to ease housing shortages in a range of regions," he said.
However, Mr Stephens also noted there were several variables open to the Government or Reserve Bank, should house prices take too much of a nose-dive.
He said the labour market was expected to stay in "pretty good shape". Sharp house-price declines usually occurred when unemployment rose, but "that’s not something we anticipate", Mr Stephens said.
While the Reserve Bank had tightened some aspects of the LVR, he said it was "ready and able" to relax its LVR mortgage lending restrictions, particularly if the market turned very negative.
It was also possible the Government "might go cold" on some of its proposed policies, if house prices started to fall sharply.
"After all, the only thing less popular than rising house prices is falling house prices," Mr Stephens said.
Changes afoot affecting housing market
• Mortgage rates are more likely to rise than fall.
• The bright line test for investors owning a house has been extended from two to five years before reselling, or pay a capital gains tax.
• The Government’s tax working group will probably recommend capital gains tax excluding the family home. Not before the next election.
• Foreign buyers set to be banned, probably from the middle of this year.
• Property investors will lose part of their tax advantage over first-home buyers. "Negative gearing" ; claiming tax losses which reduce their overall tax bill, phased out or removed from next year.
• Migration slowing, construction picking up; an easing of housing shortage.