“Little respite” for the fall of the New Zealand property market

New Zealand could be on the cusp of a global financial crisis-style housing market downturn with “little respite” for falling house prices in the coming months, according to an industry expert.

CoreLogic New Zealand’s head of research Nick Goodall said property values ​​nationwide fell 0.8% in June, which was the third month in a row with a decline at this rate.

The House Price Index (HPI) also showed the 2.3% quarterly drop was the biggest three-month drop since February 2009, just before the market bottomed after the GFC.

“As the downturn sets in and interest rates are set to rise further, more attention is now being paid to ‘how long and how far will this go,'” Mr Goodall said.

“Of course, no one knows for sure, but the long post-GFC recovery offers insight into a potential scenario that could unfold.”

After GFC, Mr Goodall said the market had taken a “bathtub” shape, with an initial gradual decline of 9.9% over 17 months, followed by a period of relatively stable conditions, before rising back to the bottom. five-year pre-GFC peak. later.

“While the economic and credit environments are remarkably different between 2008 and 2022, housing affordability is lower and interest rates are rising, not falling like in the late 2000s,” he said. declared.

“Under these circumstances, it is difficult to foresee any respite from the decline in real estate prices in the short term.

“Affordability constraints coupled with higher interest rates and tighter lending terms are expected to limit demand for housing over the coming months and likely until interest rates begin to fall again.

“While lower house prices will support improved affordability, higher mortgage costs and tighter lending policies are likely to outweigh the renewed affordability benefit.”

Auckland recorded the biggest drop in property values ​​in June, with the HPI recording a 1.9% drop for the month and a 4.9% drop for the quarter.

The average property value in Auckland is now $1,445,624.

But Mr Goodall said the numbers had to be seen in the context of market changes.

“When it comes to property values ​​in Auckland, it is important to look beyond median sale prices as they are often affected by a change in the mix of properties that reach agreement over the two time periods analysed, so that an index measures all properties in an area regardless of whether they have transacted,” Mr. Goodall said.

“In other words, Auckland could see more expensive self-contained accommodation dominating sales in any given month, but cheaper townhouses could take over the next month.”

The HPI showed Christchurch saw the strongest property value growth in June, up 2.6% to $783,216, followed by Hamilton with a 1.8% jump to $880,947.

However, Wellington, Dunedin and Tauranga all recorded similar falls to Auckland.

Source: CoreLogic New Zealand

Regional results

Outside of major cities, few areas show consistent growth.

Hastings recorded 1.1% property value growth in June but remains down 2.7% for the quarter, while Whanganui property values ​​rose 0.7% in June but is still down 2% for the quarter.

Gisborne recorded the largest monthly decline at 3.2%, followed by Lower Hutt at 2.8%.

Source: CoreLogic New Zealand

Owner occupiers

Mr Goodall said that in addition to the affordability constraints already mentioned, for those already in the market, they now face the increased costs of higher interest rates.

“These rates are increasing rapidly, as if climbing the steepest parts of Mount Ruapehu,” he said.

“But while the lending environment, including the toughest loan-to-value ratio limits on record for homeowners, is likely to limit demand for property at 2021 prices and lead to further gradual declines in values, there are a number of safeguards in place that should protect the market from an outright collapse in values.

“First, and probably most important, the tight labor market and historically low unemployment rate are likely to continue.

“As long as borrowers can maintain their jobs and income, they are likely to adjust their discretionary spending to maintain mortgage payments. This opposes mortgage stress resulting in heavily discounted or worst-case mortgage sales.

“The mortgage viability tests applied at the time of inception, along with many borrowers moving ahead of their repayment schedules, will also provide further protection against potential problems.”

Investors

For investors, faced with a more heavily regulated market, affordability pressures similar to homeownership and the full force of inflationary pressures, finances are becoming more difficult to accumulate.

“As the barriers to obtaining finance such as loan limits are higher, the cost of money (mortgage interest rate) increases and the cost of housing such as values, maintenance and reduced tax benefits is also high, many investors (or would-be investors) simply won’t be able to justify adding a property to their portfolio,” Mr Goodall said.

“Some investors may be comfortable ‘supplementing’ their property with other income for a while, but that has a limit.

“Furthermore, if we do indeed see a ‘bathtub’ shaped recovery, near-term capital growth expectations should also be tempered, leaving investors focused on a long-term horizon and/or short-term yield. .”