WELLINGTON (Reuters) – When Aarti and Gaurav Kathuria were saving for their first home, a three-bedroom townhouse in Auckland, they cut back on restaurant meals and other expenses so they could build up the big deposit.
Now, just months after paying NZ$875,000 ($560,000) for a home in one of the world’s most unaffordable cities, they face a new challenge: house prices. fall, while mortgage rates and the cost of living rise.
Falling property values are the product of policies designed to remove some of the heat from New Zealand’s scorching housing market. But for people like the Kathurias, the hit to household wealth has meant a tightening of purse strings.
“All you can do is scale things down,” Aarti Kathuria said.
House prices in New Zealand, which were already high before the COVID-19 pandemic, jumped 43% in the two years to December 2021, according to the Real Estate Institute of New Zealand. They are down about 1% since December.
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“Over the past 12 months, people who have entered this very heightened home buying frenzy will be challenged,” Reserve Bank of New Zealand Governor Adrian Orr said last week, noting that most households remain in a strong capital position.
The Kathurias also try to save 30% of their income to provide a financial buffer for future costs. With rising gas and food prices, they take the train to work, walk to the supermarket instead of driving, and rent a spare room.
Housing affordability has plummeted over the past two years as house prices and debt levels have risen, due to historically low interest rates, massive tax breaks and an inability to spend for trips abroad.
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Analysts at Australian financial firm Barrenjoey said nearly 40% of loans in New Zealand were given to borrowers with more than six times their income in debt.
The RBNZ, which must take house prices into account in its policy deliberations, began raising the benchmark rate in October last year, calling house prices “unsustainable” at the time.
It has so far raised the cash rate by 1.25 percentage points and plans further significant increases.
Last week, Orr told a parliamentary committee that house prices still needed to fall by up to 20% more before reaching sustainable levels.
Some economists now see property prices falling around 10% this year.
While lower house prices would help meet the government’s affordability targets, the combination of lower asset values, runaway inflation and higher debt burdens could reduce spending. of consumption.
This would make it harder for recent buyers to repay their loans as interest rates rise.
“A sharp correction remains a plausible outcome that would have broad economic implications,” the RBNZ said last week.
The central bank expects around 50% of those who bought a property in the last 12 months will have to “tighten their belts” if mortgage rates hit 7%. Currently, the major banks offer a floating mortgage rate of around 5.5%.
Miles Workman, senior economist at ANZ Bank, said recent buyers who have borrowed heavily were most at risk of falling into negative equity as prices fall.
“It’s going to hurt from a psychological point of view,” he said. “Hopefully these first-time home buyers can grit their teeth and get by, as the job market is very tight.”
Economists expect a blow to consumption as the combination of higher loan repayments and rising prices makes households cautious about spending.
Westpac’s acting chief economist for New Zealand, Michael Gordon, said all of these factors could weigh on the wider economy.
“The Reserve Bank faces a very difficult balancing act – probably the most difficult it has faced in the era of inflation targeting,” he said.
(Reporting by Lucy Craymer; Editing by Sam Holmes)
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