New Zealand house prices continue to soar at the beginning of 2021. Will house prices drop in 2021? Or will house prices keep increasing? Will the Reserve Bank’s moves cool down the overheated market? Prosperity Finance team shared Experts’ forecast on NZ housing market for 2021, analysed what’s driving NZ house prices higher, and what factors will influence the property market in 2021.

NZ housing market forecast 2021

Video Timeline

1. Will NZ house prices drop in 2021? Or will house prices keep increasing? – 00:47

2. What’s driving NZ house prices up? – 02:48

3. NZ housing market forecast 2021: Will the surge be slowed? – 04:25

4. Our suggestion for purchasing first home, upgrading home, and property investing – 05:44

1. Will NZ house prices drop in 2021? Or will house prices keep increasing?

Westpac's economists predict that annual house price will reach its peak at 16 per cent in June, and then drop slightly to 12.2 per cent by the end of 2021.

ASB and BNZ say the house prices are more likely to have double digit growth by the end of 2021, but they haven't come out with a concrete number.

Jarrod, the chief economist at Kiwibank, was the most conservative among major banks, tipping a modest 5 to 6 per cent growth by the end of 2021.

The economists’ predictions vary, but they all agree that New Zealand house market still have a way to run yet and the house prices will build on records this year.

We are picking another growth this year, but not at the same pace as 2020. This is because many people who planned to buy a property have already purchased last year. Plus, major banks have tightened up the LVR rule for investors.

2. What’s driving NZ house prices up? 

Low interest rates

House prices are being driven higher by low interest rates. The current interest rate of 2.29% hits the historical low, and rates are predicted to stay low or drop further over the coming years.

When interest rates fall, first home buyers find that the rent-or-buy decision favours buying because their rent expense exceeds the home loan repayments. Not to mention the potential of the capital gain they can build over the years. Investors are active because they’re getting not only the capital growth but also the positive cash flow from property investing.

Housing shortage

It’s also driven by long term housing shortage. Although the construction sector is booming, the gap between supply and demand is still huge, which is one of the factors that keep prices up. Thanks to Covid-19, net immigration almost drops to zero. Despite that, the shortage is still ongoing and significant.

Higher return and less risk

Property investing has ranked as the top investment pick for many New Zealanders. Despite that there are various ways to invest your money, some appear to be less attractive and higher risky during the pandemic of Covid-19.

3. NZ housing market forecast 2021: Will the surge be slowed? 

If interest rates rise

The rising of interest rates can help cool the market down. But the chance of that is very tiny – interest rates are predicted to keep low or drop even further in 2021.

Tougher lending rules

One action that is already being taken is the reinstatement of LVR (loan to value ratio) in March 2021. In fact, all banks have been reining in lending ahead of the official effective date, bring in 30 per cent deposit requirement for investors. If required, the Reserve Bank may lower LVR to where they were in previous year – say 40 per cent deposit for buying an investment property, then we’d expect to see the cooling down of housing market.

Second, Debt to Income ratio rules, restricting how much home loan a bank can lend to a borrower based on the total income, may be requested by the Reserve Bank. For example, if the debt-to-income rule becomes effective and the ratio is six times, say your annual income is $100k, then the maximum loan amount that your bank will be allowed to lend you is $600k.

4. Our suggestion for purchasing first home, upgrading home, and property investing

Tips for first home buyers

If you’re first home buyers, we’d suggest getting onto property market as soon as possible. It makes sense to service your own home loan, rather than paying rent, when we’re in the low interest rates environment. The housing market is growing rapidly and if you keep waiting for your perfect house, then you probably missed out the opportunities.

Especially for those who have very limited deposit (say 10 per cent), your deposit will potentially be less than 10% as the prices up. Consequently, you may end up not having enough deposit and can’t buy anymore. That’s why we aren’t suggesting wait for your perfect home.

Plus, having your own property also gives you the opportunity to see your property growing in value over the years. When you’ve built enough equity in a property, you can buy a better home later on.

Tips for upgrading home

When you’re looking to upgrading home, the first step is engaging with an experienced mortgage broker and accountant as soon as you can, to determine whether you need to sell your current home or not:

If you have to sell your current home, then list the property on the market as soon as possible when the property market is still hot now.

If it’s not necessary to sell your current one, and you intend to keep your existing home for a long-term investment, then talk to your accountant and work with your mortgage broker to build a structure that potentially help you save thousands a year, as well as protecting your valuable assets. What you want to avoid is, when borrowing money to purchase your new home, all new loans are for the purpose of buying new home, and have little loans against your existing home (converting to a rental property later). As a result, the current home / new investment property will generate big taxable profits. That means you probably end up paying a few thousand dollars every year, which you could potentially avoid if you have a good structure.

Tips for property investors

The old real estate cliché – location. If you’re investing in property, location is one of the most important and fundamental factors when choosing an investment. You want to invest in main cities, centres, or good suburbs where the economy is robust. Even during the recession time, there's still substantial demand for property.

Next, work out your buying rules and stick to them. Your borrowing capacity is mainly constrained by two core factors – number one is your deposit plus equity because banks won't lend you 100% against a single property without enough cash or/and equity. On the other hand, it's the serviceability. That means how much loan you can service is based on your total income including your job income, your investment income, et cetera. Normally the two legs are not equal. When you purchase your next property, you need to know which side is weaker so that you can work on it to narrow the gap.

Think ahead, act now

If you’re planning to apply for a home loan, we highly recommend you start the process now. This is because a longer time required to process home loan applications due to the hot property market sales activity. Plus, when you seek advice from your mortgage broker and tax accountant to review your current situation, it often takes time for you to make the changes.

Got questions? Or seek help? We’re more than happy to chat. Call us at 09 930 8999 for a chat with one of our mortgage advisors. At Prosperity Finance, we don’t have a one-size-fits-all solution for your home loan. We look at your case, understand your needs and situation then make a tailored solution for you. 

Further Reading:

NZ Interest rates forecast for 2021 – Will interest rates stay low or back up?

ANZ now requires 40% deposit for residential property investment loan

Turning your home into a rental property? Get the structure right

Disclaimer: The content in this article are provided for general situation purpose only. To the extent that any such information, opinions, views and recommendations constitute advice, they do not take into account any person’s particular financial situation or goals and, accordingly, do not constitute personalised financial advice. We therefore recommend that you seek advice from your adviser before taking any action.