With a bigger drop in values and sales volumes expected in 2023
The New Zealand property market has experienced a bigger-than-expected downturn in 2022, according to CoreLogic’s annual Best of the Best Report, which confirmed that this year was indeed a buyer’s market.
Kelvin Davidson, CoreLogic NZ chief property economist, said the introduction of tighter lending regulations, LVR rules, higher mortgage rates, and more listings combined to tip the balance of power away from sellers.
“Our outlook proved to be correct, but we, and many others, underestimated how deep the downturn in sales volumes would become and also how far house prices would fall,” Davidson said. “It’s been striking just how weak sales activity has been this year, as buyers have taken their time to decide about purchases and vendors have also been able to ‘sit tight’ too – assisted by low unemployment.”
For the 2022 calendar year, total sales volumes were estimated to be around 67,000, which was the lowest since 2010, and the third-lowest in the past three decades.
Davidson said property values fell around -10% from the peak for national average values, with a further -10% decline expected in 2023.
“For context, the GFC saw a final peak to trough fall of -10%,” Davidson said. “It was also our view the scale of the housing downturn would be diverse across the country, so it’s not surprising to see varying degrees of resilience. Previously buoyant areas such as Porirua, Upper Hutt, and Lower Hutt have become some of the weakest markets in New Zealand, while in contrast, many parts of Canterbury – including Christchurch, Ashburton, and Timaru – have fared a bit better. However, nowhere is ever immune to all market forces.
“Overall, then, 2022 has been a challenging year for the property market, which would have been worse if employment hadn’t been as strong. Next year, the jobs market will remain vital in limiting the size of price falls and the potential scale of negative equity and/or mortgagee sales.”
Davidson noted that large deposits have remained a barrier, especially for investors (40%), although the sheer scale and speed of mortgage rate hikes has probably been the bigger influence.
“This has not only reduced how much money a new borrower can get, but also required a big adjustment for existing borrowers as they’ve rolled off previously lower fixed rates and onto a significantly higher repayment schedule,” he said.
CoreLogic analysis found that first-home buyers (FHB) have retained a decent market share, from around 20% of purchases in early 2022 up to 24-25% in the latter half of the year. Mortgaged multiple property owners (MPOs, including investors), meanwhile, have been quieter, though cash MPOs have seen a rising market share.
“The Reserve Bank hasn’t pushed as hard with lending regulations as might have seemed likely at the end of last year,” Davidson said. “We previously speculated about a floor on serviceability interest rates from the middle of 2022, which hasn’t eventuated. Meanwhile, formal caps on debt-to-income ratios have been pushed back until early 2024, having potentially been on the cards as soon as early 2023.”
CoreLogic said the general outlook for the housing market remains weak, considering RBNZ’s predictions of a mild recession next year, no easing of inflation until mid-2023, and increases to the cash rate and unemployment.
Davidson said both the property market and homeowners would find the combination of a higher unemployment rate and the risk of typical mortgage rate rising to well above 7% tricky.
“Most importantly, for now however, there doesn’t seem to be a major risk of outright, large-scale job losses,” he said. “Indeed, the rise in the unemployment rate in 2023 could be more about a larger labour force. Of course, being new (or returning) to the jobs market and unable to actually find a position won’t do much for borrowing ability or home-buying demand. But at least for those already in a job and with a mortgage, there should be some protection from widespread repayment problems and distressed sales.”
CoreLogic said there was the risk of previous OCR hikes suddenly and significantly hitting in the early months of 2023, which might remove the need to tighten monetary policy as much as was currently expected. These, in turn, might lead to a lower peak for mortgage rates, but it might also mean a weaker labour market and more job cuts.
“With gross domestic product figures soft and mortgage rates higher it’s hard to see property sales volumes climbing too much in 2023,” Davidson said. “A total of between 65,000 and 70,000 is likely to be repeated and as the Reserve Bank is forecasting, it also seems plausible that property values could drop another -10% or so, taking the total fall to about -20%. If this does eventuate, it’s important to remember prices will still be 15-20% above pre-COVID levels.”
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