Can The Fall In NZ House Prices Stoke Demand?

Thursday, 1 September 2022, 7:39 pm
Press Release: Kalkine

Highlights

• The New Zealand economy has witnessed negative growth in the first quarter, but the central bank is keen on raising rates.
• The housing market is now not as hot as it was last year, but this price affordability is marred by rising costs of a mortgage loan.
• Many fear that if the economy loses further steam in the wake of global and local concerns, it can negatively impact mortgage repayments.

The world economy is going through a rough patch, but is this simple statement enough to understand the ground realities? In the US -- the world’s largest economy, which is often considered a gauge -- indicators seem to be pointing toward a conflicting scene. On the one hand, there is widespread concern about a deep recessionary phase. On the other hand, July job opening data indicated that nearly two jobs are available for every jobless person. One might wonder why there are so many openings when the economy is heavily subdued and corporates are reporting muted earnings.

In New Zealand's comparatively very small economy, indicators are equally confusing. In December last year, the Prime Minister had to calm the nerves by declaring that her government was “determined” to bring down house prices to an affordable level. Her statement came in the wake of record high prices, up over 23% annually in November 2021. The median house price in the country peaked to NZ$925,000, and in Auckland, it hovered above NZ$1 million. All this was when the NZ economy had declined by 3.7% in the September quarter.

Do house prices have a correlation with overall economic growth? Can it be assumed that when the economy is booming and people have money, house prices would rise, and vice versa? Now that the economy is yet again under pressure -- it contracted 0.2% in the first quarter of 2022 -- house prices have started to fall.

Decline in house prices

The biggest relief came in July 2022 when a key indicator of the housing market -- the Real Estate Institute’s price index -- recorded its first annual fall in 11 years. The gauge was already dropping on a monthly basis over the past many months. The sales volume too had declined by over one-third in July month. According to Kiwibank, the country, which has reeled from low house inventories, is set to have a supply-side surplus over the next year. If that happens, affordability might get a significant boost, especially for low-income buyers.

What has caused such remarkable correction, if not crash, in house prices? Many analysts consider the interest rate hikes was a key factor. Interest rate on mortgage loans was as low as 3% almost one year back, and now it stands at anywhere over 5%. Separately, households are compelled to spend extra on necessities, including food and energy, due to rising inflationary pressures. This must have dealt a blow to New Zealanders’ purchasing power, especially when it comes to big-ticket purchases like a house, thereby hitting housing demand and prices.

Also read: Is NZ’s Budget 2022 going to be a `Well-Being’ one?

Interest rates and inflation

Mortgage interest rates are high now as compared to the pandemic times because the central bank has subscribed to a hawkish stance in the wake of high inflation.

The Reserve Bank of New Zealand (RBNZ) decided to hike the official cash rate (OCR) by a whopping 50 basis points in August 2022. This was the seventh consecutive raise, and the OCR now stands at 3%, the highest level in many years. A high OCR makes all borrowings costlier, including mortgages. Separately, the central bank also hinted toward similar aggressive moves over the coming months, with projections that the OCR can hit 4% by early 2023.

RBNZ’s move from a deeply dovish stance during the pandemic days to now heavily hawkish is because it, like all other central banks, including the US Fed, wants to tame inflation. People worldwide complain about high prices, which is an outcome of multiple factors, including near-zero interest rates during the pandemic phase, supply chain concerns, etc. In New Zealand, inflation in the June quarter was at its highest point in almost 30 years. Most things have become costlier for Kiwis, from food to housing to transport.

Also read: NZ Facing Massive Rise In House Prices- Will It See A Silver Lining?

Have housing pains eased?

Some analysts believe that regardless of the dip in median house price and improvement in supply, things are more or less the same for first-time buyers. This is because while a rise in the mortgage interest rate does cause a dip in demand for houses, it makes it expensive for the borrower to repay the loan in the first place. What could have been good was a rise in income levels of Kiwis; however, a subdued economy typically does not permit strong and consistent wage growth.

There are also concerns about buyers who acquired a housing asset during the peak frenzy of 2021. These buyers have a negative return on their investment, which is indeed a sentiment breaker, particularly for first-time buyers burdened with mortgage repayments. The fear is that the central bank will continue with its rate hike spree, which can ultimately hit the economy and the jobs market. So, even though property prices are lower as compared to last year, a jump in mortgage rates would make debt servicing difficult for first-time property buyers.

This might be one of the reasons behind a sharp drop in the house sales volume in July 2022. Low prices might not be attractive when the economy is going through a rough patch and households are forced to deal with high costs of even the most essential items.

Uncertainty persists

The statement that the economy is in a rough patch cannot be enough to understand the ground realities. The good news is that houses in New Zealand are now affordable as compared to last year. But mortgage repayment is becoming costlier for prospective buyers, and concerns around an even rougher patch ahead if continued rate hikes by the RBNZ pave the way for a deeper economic downturn. Housing demand can suffer collateral damage amid all this.

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