This as mortgage rates surge
New Zealand house prices saw their first annual drop in more than 11 years in October as skyrocketing home loan interest rates dampened buyer enthusiasm.
Read more: House prices will fall at least 27%, ANZ warns
According to CoreLogic New Zealand, prices slipped 0.6% from the prior year – the first year-on-year drop since June 2011 – and declined 1.3% from September, the seventh consecutive month values dropped.
Nick Goodall, CoreLogic research head, said “stretched affordability is constraining the ability and willingness of all buyers to get or extend a mortgage,” which “all leads to reduced demand and contributes to falling prices,” Bloomberg and Reuters reported.
The Reserve Bank of New Zealand (RBNZ) has hiked the OCR by 3.25 percentage points to 3.5% over the past year, with some economists expecting the benchmark to hit 5% or higher in 2023.
To match the aggressive tightening cycle, trading banks have raised their home loan interest rates, with further mortgage rate hikes expected by CoreLogic.
Read next: Mortgage holders face more mortgage pain as interest rates rise – ANZ
The variable interest rate averaged 7.1% at the end of October, Goodall said, but at least one major bank uses an 8% assumption to test whether a customer can afford to make their loan repayments, and that test rate could increase to 8.5% if the OCR surges even further in 2023.
House prices were tipped to slip about 13% this year and decline further next year, with a peak-to-trough slump in the market of 18% to 20% forecast, Bloomberg and Reuters reported.
Just this week, RBNZ said that the country’s financial system was resilient as a whole, but global financial stress would test this.
“The rising global interest rates necessary to curb inflation will test New Zealand’s financial resilience,” RBNZ Governor Adrian Orr said. “While our financial system as a whole is resilient, some households and businesses will be challenged by the rising interest rate environment.”
RBNZ said that despite New Zealand’s high levels of employment and sound government fiscal position, the country was not immune to the increasing downside risks to the global economic outlook.
The central bank, however, said house prices remain above their sustainable level, and that a further gradual decline would be positive for long-term financial stability. It also noted that there was a small number of recent buyers who are in negative equity, and this will grow further if prices continue to drop.
RBNZ said that “with widespread negative equity, banks would be more at risk of losses if people can no longer afford their mortgage, for example if they lose their job,” Bloomberg and Reuters reported.
