Property and Lending updates

This month we look at housing market developments across 14 key regions. Now that interest rates are normalising after the post-COVID rollercoaster, regional over- or under-performance is worth investigating. We evaluate regional house prices, indicators of housing market tightness, key regional economic indicators, and regional measures of housing affordability. Most regional housing markets are currently on a loosening trajectory, though house price cycles have been far more pronounced in some regions than others. The West Coast takes the prize for the strongest performance, with house prices up around 65% from December 2019, while Auckland has seen the weakest growth, with prices up only around 10% over the same period. How does your region stack up? See this month’s Feature Article.

The housing market continued to weaken in July, with the REINZ House Price Index falling 0.6% m/m. Subdued sales over recent months and rising listings on the market suggest weakness is likely to persist in the near term, with prices likely to correct further to clear the backlog of supply. But a lot has happened in the past month that makes the July market snapshot feel like ancient history. With the RBNZ kickstarting its easing cycle this month, and mortgage rates having already responded, we expect dynamics in the market to shift later this year, with a recovery in house prices over 2025. Our updated projections show mortgage rates falling to around the level that prevailed in the middle of last decade. Mortgage rates are an important driver of the housing market, but they aren’t the only driver. There’s still plenty of strong headwinds facing the market. We compare the current landscape to the conditions that prevailed back in 2015, highlighting that risks to the housing market certainly aren’t one-sided.

New Zealand citizen departures to Australia are picking up sharply as the local economy underperforms. With so many Kiwis jumping the ditch, it’s worth asking what kind of housing market they might be jumping into. This month we open that can of worms to investigate that very question. While we don’t get all the way to the bottom of the can (this is a feature article, not a book), we discover a few interesting differences. And in terms of the relative housing outlooks, it appears that Australian house price inflation is set to outpace that in New Zealand for a little while yet. 

Housing affordability deteriorated significantly following the pandemic, with house prices relative to incomes touching highs never seen before. It’s been a particularly bumpy ride for new entrants, who have not only had to save a larger proportion of their income to come up with a deposit (and/or wait longer), but who now face a much higher debt-servicing cost as a share of income compared to the decade preceding the pandemic. The good news is that the worst is hopefully behind us. But international comparisons show that some economies may have it even worse, implying that the recent peaks in unaffordability seen in NZ may still be shy of any “natural limit”. We present a range of affordability indicators as well as a weighted affordability index based on some of these measures. Plugging in our forecasts show that the only major relief on the affordability front over the next few years is expected to come via the debt-servicing channel as mortgage rates decline. But overall, our outlook implies housing will remain less affordable over the next few years than it was prior to the pandemic.

Construction may be about to bottom out. Fair to say, the housing market rebound has been underwhelming since it found a floor earlier than anticipated in April. However, the outlook for construction is nonetheless intriguing, as population growth and still-high interest rates square off. While consents are yet to find a floor, builders in the ANZ Business Outlook survey became much more optimistic some months ago, and their colleagues in the NZIER QSBO now concur. That suggests that consents and construction activity could soon base. The RBNZ is relying on a prolonged slowdown in residential construction as part of their plan to bring down domestic inflation, and the risk is that the slowdown will be sharper but not as prolonged as the RBNZ expects. The implications for the inflation outlook are unclear.