The hangover

The Auckland housing market is now suffering a hangover from its recent excesses, food price inflation has proven very low, and world dairy prices are dropping again. This reinforces our view that the Reserve Bank will need to reduce the OCR further than the market is currently expecting.

The message from the REINZ’s October housing report was decisive. Nationwide house sales fell by 7%, the time taken to sell a house lengthened, and the house price index fell 4% – the biggest single-month decline on record going back to 1992. The weakness was especially concentrated in Auckland, with sales down 15% and prices down almost 5% in just one month.

This confirms the idea that some of the recent froth in the Auckland market was driven by investors getting in ahead of the new regulations. From 1 October, all investment properties bought and sold within two years will be subject to income tax on the capital gain. (Previously, the tax hinged on an assessment of the buyer’s intentions, a test which still applies for investment properties sold after two years.) In addition, overseas buyers are now required to register for tax and open a bank account in New Zealand.

At this stage it’s not clear whether these measures will have a sustained dampening effect on the housing market, or to what extent they simply brought purchases forward. But either way, it appears that investors have done their dash for now, and the Auckland housing market is likely to suffer the resulting hangover for at least a few more months.

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