NZ house prices continue to decline

New Zealand house prices continued to fall throughout May, with the trend towards weaker housing market conditions likely to continue, according to CoreLogic.

CoreLogic’s House Price Index (HPI) revealed another -0.8% decline in national house prices, which was consistent with April's -0.8% drop. The quarterly fall of -0.9% across the country was the biggest drop over a three-month period since the end of 2010, when the market was still recovering from the Global Financial Crisis.

“For the main centres, the persistent declines in both Wellington and Dunedin housing values have seen the annual growth rate plummet to single figures, while Hamilton is hanging on to double-digit growth at 10%,” said Nick Goodall, CoreLogic NZ head of research. “For Wellington, this has been a dramatic reduction from the heights of 36.1% growth in the year to October 2021. Christchurch remains the only main centre experiencing any real growth – supported by better affordability. The latest house-price-to-income ratio in Christchurch sits at 6.8, compared to next-best, Wellington, at 8.1. Similarly, the share of income required for mortgage repayments is more favourable in Christchurch (38%) ahead of Wellington (45%).”

Read more: CoreLogic reports patchy price falls across NZ suburbs

Goodall said that while strong value growth was the key factor for the deterioration in affordability over the last two years, increasing rates were now the key factor.

The Reserve Bank lifted the cash rate by 0.5% to 2% last week, with further increases expected as the central bank fights hard against inflation.

Read next: Higher OCR will keep the pressure on the housing market – CoreLogic

“The published forecast for the OCR now has a peak of 4% in the middle of 2023, so little more than a year away,” Goodall said. “Only three months ago, the forecast peak rate was 3.5% at the end of 2023. Things are moving quickly.”

The rapid upwards trajectory of the OCR and forecasts of further cash rate hikes have led to higher mortgage interest rates. With 48% of mortgage debt to be refinanced before the end of March 2023, many Kiwi borrowers will face a significant lift in their payments.

In some cases, Goodall said the new interest rate being secured could be above the serviceability rate they were tested at, which bottomed out at 5.5% in the middle of 2021.

“This will require some severe tightening of other spending, which is expected to eventually slow inflation, but also has the potential to weaken economic growth more broadly, to the point where a recession is being talked about as being more likely,” he said. “The RBNZ have given themselves some insurance for this, though, stating that ‘Once aggregate supply and demand are more in balance, the OCR can then return to a lower, more neutral level,’ thus opening the door for OCR cuts if and when required, to provide more stimulation.”

Goodall noted, however, that while tighter, more expensive credit has contributed to the current managed correction and with downward momentum persisting, the underlying strong labour market has continued to offer something of a foundation.

RBNZ predicted the largest quarterly fall in property values to occur in Q3 this year (-2.7%), with further falls expected to take the annual rate of change to -8.1% at the end of 2022. The downturn then culminates in a total forecast fall of -11.8% from peak to trough, come the end of March 2023.

While not an insignificant drop, Goodall said it should be relatively manageable for many people given the recent upswing.

“If this scenario were to play out, it would ‘only’ take nationwide values back to the same level as at the middle of 2021, limiting the number of recent entrants who could be exposed and in negative equity,” he said. “Through the last major downturn (Oct 2007-Mar 2009) values fell 9.9%, but it did take a total of five years for values to recover back to the previous peak, so expectations of a return to an upward trajectory should be tempered. The impact of the weakening market on property values is becoming clearer, and while the reduced market activity is often related to reduced real estate agent commissions, the broader impacts of fewer market transactions are not often considered.”

CoreLogic predicted 78,000 sales throughout 2022, a significant drop from the 92,000 forecast just three months ago – a change mostly driven by the sharp rise in interest rate expectations, which impact the amount of money people can borrow and will further slow the market.

“Not only will agents be budgeting for less income, there’s also a broad range of industries and professions intertwined with the real estate industry and the transactions within,” Goodall said. “For example, registered valuers will likely see reduced work, fewer transactions will hit the banks’ bottom lines as new lending activity reduces, moving companies may have less big moves to do, insurance companies could see fewer new enquiries, and even telecommunications and utility companies could see less demand with fewer new households being created. The impact of reduced real estate transactions (let alone reduced values) on the broader economy should not be underestimated, and many businesses should consider budget scenarios with up to a 20% reduction on activity compared to 2021.”