Are New Zealand House prices falling?

Unless you have been living under the cave, you would have seen & read about chaos surrounding the global investment markets. From Wall Street to New Zealand, the wave of economic uncertainty has hit every corner of the world. The rise in interest rates, high inflation and ongoing trade tension between world super-power is causing asset prices across sectors to respond to the downside.

The real estate market in New Zealand is no exception, with a noticeable drop in house prices across the country. In this article today, we will explore the current situation of the New Zealand housing market, identify the possible triggers for this decline, look back in history for similar patterns and attempt to look into the future to understand what may be in store for the New Zealand housing market.

What has happened?

The New Zealand property market peaked in late 2021, on the back of strong price growth over the last several years. The growth accelerated during the pandemic years as evidenced on the graph before prices corrected to where we are today.

New Zealand House prices are correcting after many years of strong growth
Source: https://www.qv.co.nz

The prices drop varies across regions and cities, with Auckland and Wellington being the hardest hit. This is no surprise since the very same regions also saw the most growth in recent years and thus the corrections are somehow proportional.

Source: Screenshot from REINZ monthly property report 18 April 2023

**Declining prices on lower sales volume**

Whats interesting is that while house prices have declined, this is on the back of low sales volume - indicating a market slowdown rather than significant financial distress among homeowners.
A lower volume of transactions suggest that sellers who could no longer hold on sold at lower values that registered the price drops, while many potential buyers could also be on the sideline seeking clarity waiting to enter. This creates a strong fundamental support to the market.
It would be concerning if the price decline were on higher sales volume, suggesting that majority owners are exiting and can become a self continuing cycle.
**Drop in listings**
Nationally, new listings decreased by 17.7%, from 11,224
listings in March 2022 to 9,242 listings in March 2023. This suggest increased holding power at current levels as many are not willing to sell
Source: Screenshot from REINZ monthly property report
18 April 2023

The current period is also taking longer for seller & buyer transactions to conclude, as compared to a year ago, indicating a shift to a buyer’s market. This provided home buyers and investors more options, negotiating flexibility and time before committing the their desired property.

What could have triggered?

LVR restrictions
The house price declines can be attributed to a variety of factors.

Firstly, the Reserve Bank of New Zealand has implemented measures aimed to slow down house price growth such as limiting mortgage lending and increasing deposit requirements. This has the effect of curbing buyer demand as it reduces the pool of investors and home buyers who can now afford the downpayment on their desired property. Similarly, this also limits a buyer's maximum property purchase price, based on the deposit that they have.

This is done via the loan-to-value ratio (LVR) restrictions, which have been in place since Oct 2013 and revised several times over the years. In 2021 alone, the LVR restrictions was tightened 3 times, with the latest one on 01 Nov 2021 which is also the same period when the housing price index peaked and corrected.

The home-to-value ratio for investor now stands at 40% for existing properties, 20% for the owner-occupier buyer. With lesser buyers who can afford in the market and a ceiling limit to their max purchase price based on the deposit they have, buyers and sellers would have to adjust their expectations and act accordingly.

Interest rates hike

Additionally, the rising interest rates and inflationary pressures have also played a significant role in dampening demand. It is not difficult to observe how big a role interest rates play in the housing market. This has the effect of making borrowing more difficult as the banks now uses a higher stress test rate to assess borrowers on their loan application. In other words, credit just became alot tighter and reduces the ability for people to borrow money in order to buy a home. A couple may be able to afford the deposit required but may fail to obtain a loan due to the higher interest rates. This led to subdued buyer demand on higher price property and directed willing buyers to lower-price property options with smaller loans. Some other buyers may adopt a wait-and-see approach for a more favorable financing environment before making their property move. Combined, these contributed to the drop in the median house price registered.

Source: Screenshot from https://www.rbnz.govt.nz

At the point of writing, we are already in our 11th OCR hikes as set by RBNZ. Do note that OCR rates are not the rates that consumers get from the lender/bank, but it forms the basis for the bank/lender to set their lending rates to home buyers by adding a margin to it. In determining their stress test rates, banks & lenders will then add a further buffer to the lending rate for borrowers, when assessing their eligibility. You can imagine how tiered up the rates are and how hard it can be for some buyers to obtain financing.

The rapid rise in OCR rates has reduced the borrow-ability of potential home buyers, putting a slow brake on demand in the housing market which led to the housing price index peaking and correcting.

How did past OCR hikes & LVR restrictions impact the market?

Past OCR hikes and LVR restrictions have had significant impacts on the New Zealand housing market. Since OCR was introduced in 1999 and LVR restrictions were first implemented in 2013, we will look at the housing index during this period and observe its impact. There have been varying results on the market, albeit with similar themes.

Source: https://www.rbnz.govt.nz, https://tradingeconomics.com

Observations:

1) Periods of OCR hikes, will always be followed by periods of OCR easing.

2) Periods of OCR hikes induce a decline in house prices, either within a short period or follow a lagging effect

3) Periods of OCR easing always follow by house prices going higher

4) Periods of LVR restriction easing follow by the upwards performance of the housing index

In this example, you could see the correlation on the housing index during periods of OCR hikes and periods of OCR easing

What’s ahead and is this a good time to buy / enter?

What's ahead?
The rapid OCR hikes and tightening of LVR restrictions since 2021 have undoubtedly had a cooling effect on the housing market, leading to a drop in median house prices. Past monetary decisions on the increase or decrease of the OCR rates have strongly indicated that they do not move in one direction forever. Whatever goes up must come down and vice versa. If history is any indication, periods of OCR hikes are followed by OCR easing and a subsequent rise in housing prices. For the record since OCR was introduced in 1999, we are experiencing the longest consecutive streaks of OCR hikes and are currently into its 11th time as announced by RBNZ on 5th April. Most economist consensus is for OCR to peak with 1 or 2 more rounds of hikes, pending an improvement in inflation numbers. From there, the odds are good that OCR will either remain flat or start to ease moving forward, providing a much-needed relief for the market.

On the LVR restrictions front, RBNZ has just announced a proposal to ease the requirements and once approved, to be effective from 01 June 23. We might even expect more easing on the LVR restrictions as the government looks to strike a balance between preventing financial instability and promoting home ownership. However, it's important to note that while the easing of OCR and LVR restrictions may increase house prices, it is difficult to predict how quickly that increase will occur or to what extent.

Unemployment remains at an all-time low & demand for houses remains strong

The New Zealand employment market remains incredibly strong, with unemployment currently at an all-time low. This translates to strong consumer confidence and unshakeable holding power over their properties and the ability to pay mortgages or rental.

In fact, a recent end 2022 report from Corelogic suggest that there is a high degree of resilience in the New Zealand residential property market, with an incredibly high portion of home-owners being less sensitive to interest rates changes and costs. This is evidence from the data that only 21% of the entire value of the property market is held as a mortgage, with the remaining 79% as household equity. In other words, there are many homeowners in New Zealand who have been able to pay off their mortgages or have significant equity in their properties, making them less vulnerable to the potential impact of interest rate hikes in the short term.

Housing demand remains strong, in particular, first time home buyers, upgraders and investors who are taking advantage of the current climate to get into deals that were out of reach previously. These provides strong fundamental support to the entire stability of the market.

Another big factor contributing to increasing housing demand amid the current climate is the surge in population contributed by the net migration to New Zealand post-covid period. As reported on Stats NZ, net migration of more than 69,000 non-NZ citizens has moved to New Zealand for the year ended Feb 2023, bearing in mind that borders only opened from April-May 22. International students, skilled professionals and workers across various sectors have landed here and adds pressure to the rental and housing markets, potentially driving up prices further from here.

Is this a good time to buy / enter?

What should I do? Sell, buy or hold?
If you already owned NZ property, it may not be the best time to sell for maximum profits given the current market conditions. On the reverse, this could be an ideal time for you to expand your portfolio by purchasing additional NZ properties if your financial situation allows you to do so. Holding on and entering now enables you to position your investment before the next upswing in property prices, in line with OCR rates peaking and a potential relaxing of LVR restrictions.

While no one can accurately predict the bottom of a market cycle, one could stay invested and benefit when the tide changes. Historical data and even nature has shown that tides do change and its important to stay on course and even double up during opportune times. Always remember that the market moves in cycles and is critical for us to act on opportunities when they present themselves. Even if someone has entered at the highs of previous cycles, it is evidenced that this high would be broken and by staying invested, this investor would still have made good returns.

If you have yet to enter the New Zealand property market, this presents you with an unique opportunity to build your portfolio amid a potentially ending correction. Market sentiments can change very quickly and we do not want to be caught unprepared when the market shifts direction. Waiting for conditions to further improve before entering could just be buying unnecessary expensive insurance. Worst, you may even talk yourself out of it altogether when you missed the boat and did not act when you could. As the saying goes, Time in the market is always better than timing the market cannot be any better. Rather, observe for early signs of an improving situation and take advantage to enter while others are still afraid. Stay the course, focus on the longer term and let your asset value ride along the next upswing.

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