Property and Lending updates
ANZ Property Focus
ANZ Property Focus assesses the state of the property market in New Zealand, providing investors and prospective homeowners with an independent appraisal of recent developments.
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.
Following May’s weaker-than-expected REINZ data and taking signal from the forward indicators, we’ve downgraded our house price forecast slightly. We now expect house prices to rise just 1% this year vs 3% previously. It's worth noting that while a downgrade from 3% y/y to 1% y/y could give the impression that we’re able to forecast the housing market with a high degree of precision, we can’t, and nor can anyone else. But we’ve crossed a threshold warranting a forecast update, and the upside and downside risks feel more balanced around a 1% y/y rise this year than a 3% lift. In the big picture, this is only a tweak to our forecast, and it is probably best thought of as a slight delay to what we were previously expecting: modest growth, with gradually falling mortgage rates offset by softening household income prospects (including job security fears) as the labour market cools. But as always, there’s a lot more to the housing outlook than that!
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.
House prices came in a little softer than we anticipated in the first quarter of the year, and forward indicators suggest the second and third quarters could be just as soft. Auckland often leads nationwide housing outcomes, so this month we take a closer look into what some of the Auckland indicators are saying about what might lie ahead for the country as a whole. Given Auckland tends to get the lion’s share of net migrants, this regional lens on the housing market is particularly important in the context of current surging net migration. However, we find little evidence in rental yields to suggest migration is about to drive a surge in investor demand for houses. In fact, rental yields in Auckland have been somewhat muted in recent months compared to the national average. All in all, indicators of market tightness in Auckland, and the rest of New Zealand for that matter, are running on the colder side of tepid, and that points to some downside risk around our house price forecast for a modest 3% rise in prices over 2024.
Is it better to buy a house, or rent it? It’s a question a lot of people grapple with. As always, the ultimate answer is “it depends!” but in this article, we shed some light on the question by taking a long-term perspective. In what follows, we take data from 1999 to 2023, make a bunch of assumptions about the outlook, and compare cash flows of someone who buys a house versus someone who rents. The upshot? When borrowing at a high LVR (we assume 80%), servicing a mortgage and paying other ownership costs will generally be more expensive than renting in the first years of ownership. But eventually, homeownership costs will typically be lower than renting. Therefore, to the would-be borrower-buyer, what’s best does depend to some degree on how long you are willing to wait to break even. But as we show, the amount of time that takes depends on a bunch of variables and assumptions, and how you frame what ‘breaking even’ actually means. Do you care about annual cash flows, cumulative cash flows, or discounted cash flows? And what about capital gains and opportunity costs? We discuss the lot. But it’s important to note that the mythical “median person” in our analysis is likely to differ greatly from personal experiences. And as with most choices in life, whether big financial decisions work out well will inevitably partly depend on luck.
The housing market looks stagnant. While January house prices were stronger than we expected, sales were abnormally soft, listings continue to rise and days to sell are back near their 2022 peaks, especially in Auckland. We are expecting the Reserve Bank of New Zealand (RBNZ) to lift the Official Cash Rate (OCR) two more times to combat increasingly stubborn domestic inflation. Homeowners should be conscious that mortgage rate cuts in the near future are not a sure-fire bet, as the RBNZ will be unwilling to provide mortgage rate relief until they’re confident that inflation will stay in their 1-3% band. Our expectations for further lifts in the OCR put the risk of further house price falls back on the table. At this stage, it’s a risk only, because the HPI remains robust in the face of a deteriorating outlook. We still expect house prices to go broadly sideways over the first half of this year, but the picture is looking a lot less certain than it was at the end of last year.
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.
2024 editions
December 2023: Renovation nation (PDF 1.74MB)
Kiwis love a good renovation. Buying a run-down villa and doing it up has been a popular project for Kiwi families for decades. This month’s feature article explores consenting, lending, and construction data to see how the pandemic and recent elevated interest rates have affected Kiwis' appetite for renovations. The upshot: high interest rates have squeezed people’s ability to afford a do-up, with sharp rises in construction costs not helping the case for a new bathroom or kitchen. As inflation eases and interest rates decline, we expect demand for houses in need of some DIY to pick up, as first-home buyers become a larger share of the market
November 2023: A spring chill (PDF 1.59MB)
House prices rose in October, with the REINZ house price index rising 0.4% m/m (ANZ seasonal adjustment), a touch weaker than we expected (figure 1). It’s not just house prices that were on the weaker side this month; the forward indicators of sales and new listings showed that there’s perhaps some further softness to come. Accounting for the starting point surprise, and adding a little more election inertia into our near-term view, we have revised down our 2023 house price forecast and now expect house prices to fall 0.4% in 2023 (3-month moving average), versus a 0.2% rise previously. If momentum doesn’t recover after the election-related dust has settled, our 2024 forecast is on thin ice for a downgrade too (we'll get our first post-election read in December). This month we changed our Official Cash rate forecast and now expect the next move on the OCR to be lower, albeit with cuts one quarter later than previously (Q1 2025). However, insofar as markets anticipate cuts, fixed mortgage rates are likely to fall before then.
October 2023: New faces, not many new places (PDF 1.43MB)
Migration into New Zealand is at record levels. Over the last year more people than live in Palmerston North or New Plymouth have moved here on net, after accounting for departures. All those migrants need a place to live and we are not consenting and building enough new dwellings to keep pace. The extra demand for places to live is putting upwards pressure on house prices and rents, especially in Auckland. At the same time, large numbers of New Zealanders are leaving the country permanently, further raising property market churn. Net migration also boosts labour supply, dampening wage growth, so the net impact on inflation and therefore mortgage rates is ambiguous. The RBNZ is assuming it will be a small positive net impact, but time will tell.
September 2023: Going up (PDF 1.30MB)
We’ve revised our near-term house price forecast upwards and now see prices lifting around 4% (previously 3%) over the second half of this year, with house prices rising at around their current pace until autumn next year. Underpinning recent momentum, first-home buyers appear to have re-entered the market after a long hiatus. We don’t think recent levels of house price growth will be sustained over the second half of next year, as unemployment rises while interest rates remain high. Our outlook is for annual house price inflation to come in around 5% over 2024, then moderate to around 3% in 2025. If upside housing pressures result in upside CPI inflation pressures, the RBNZ is likely to respond with hikes, stopping the housing upswing in its tracks. Be careful what you wish for.
August 2023: Regional revelations (PDF 5.53MB)
This month we look at housing market developments across 14 key regions. Now that the house price cycle has convincingly turned a corner at the national level, 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. Only one region is currently experiencing positive annual house price inflation (clue: it rhymes with ‘best’ and ends with Coast). And while that region also happens to be experiencing some of the strongest retail spending relative to trend, it’s not the region with the lowest unemployment rate (Wellington) nor the region with the highest consents per capita (Canterbury). How does your local market stack up? See this month’s Feature Article.
July 2023: Running start (PDF 1.20MB)
House prices broke out of an 18-month downtrend in June, rising 0.7% m/m (sa). This was on the slightly stronger side of our expectations. We remain cautious about the outlook, and suspect that the running start to the upturn had some one-off factors nudging it along. But not all the data we monitor concurs. Auction clearance rates in particular suggest our forecast for around 3% growth in house prices over H2 is a touch soft. That may well be true, but we can’t lose sight of the broader economic backdrop: the RBNZ is seeking to engineer a looser (and more sustainable) labour market (ie higher unemployment) in order to tame CPI inflation, and if it doesn’t achieve this with the OCR at 5.5% it will hike by more. Our expectation is that CPI inflation will prove harder to tame than the RBNZ currently anticipates, pushing it back into hiking mode come November. That’s likely to lead to renewed upwards pressure on mortgage rates later in the year, and could even see housing headwinds dominate tailwinds as we head into 2024.
August 2022: No place for green shoots (PDF 1.39MB)
Why have some fixed mortgage rates fallen lately despite the Official Cash Rate lifting another 50 basis points in August? By providing an overview on how mortgage rates are determined, we hope to answer this very question in this month’s feature. Intended as a beginner’s guide, we gloss over some of the nitty gritty, rather providing a high-level overview of what banks do, where they get their funding from, and key ways in which the cost of that funding can change. In particular, we hone in on how the OCR – and expectations of what the OCR may do in the future – impact floating and fixed mortgage rates. See this month’s Feature Article.
July 2022: Hardening headwinds and soft landings (PDF 1.29MB)
The NZ Q2 CPI figures suggest high underlying (“core”) inflation may stick around longer than previously thought. And with the labour market still tightening (from already record-tight levels), the RBNZ has plenty of work to do in order to prevent a damaging wage-price spiral. We’ve added a further 0.5% points to our expectation for how high the OCR will need to go (now 4%), and that means higher mortgage rates – and more downward pressure on house prices – than otherwise. We’ve downgraded our house price forecast to reflect this, with a peak to trough decline of 15% now pencilled in (previously -12%). But forecasting uncertainty remains high.
June 2022: When, not if (PDF 1.78MB)
Residential investment is in the firing line as interest rates push higher to combat decades-high inflation, house prices fall, and shortages of both materials and labour continue to add uncertainty in the near term while limiting upside growth potential. In short, the calculus of building has shifted dramatically in the space of a few quarters and the stars are now aligned for an unwind. In fact, some indicators are already pointing sharply south, but it’s difficult to diagnose whether this is more a story about constrained supply or waning demand. We think it’s a mix of both, but come 2023 softer demand will be the dominant driver.
May 2022: Better fundamentals mean softer prices (PDF 1.58MB)
Two big events have taken place since our last edition: The RBNZ hiked 50bps on 25 May (as expected), and lifted its forecast for how much higher the OCR will need to go (that was more of a surprise); and the Government released Budget 2022, which included another increase in government spending. We have since tweaked our OCR forecast to be slightly more front loaded. While we continue to expect it to peak at 3.5%, we have also centralised some of the downside risks we are seeing to our (still very uncertain) house price outlook. We now expect house prices to fall 11% in 2022 (previously -10%), with a much soggier recovery thereafter. The latter reflects very solid progress in recent quarters towards addressing NZ’s housing deficit.
April 2022: Regional rollercoaster (PDF 5.91MB)
This month we take a look at housing market developments across 14 key regions. While the house price cycle has been broad based, there are some differences between regions when it comes to the magnitude of price gains over the past couple of years. We evaluate regional house prices, indicators of housing market tightness, key regional economy indicators, and regional measures of housing affordability. Where does your region sit? Wherever you live the answer is likely to be “on a cooling trajectory but less affordable than before the pandemic”. See this month’s Feature Article.
March 2022: A soft landing as headwinds gather (PDF 1.61MB)
Recent housing data have come in broadly in line with our expectation. Looking forward, our call change for more aggressive OCR hikes and a higher OCR peak have translated into an even softer outlook for housing. We now expect house prices to fall 10% in the year to December (previous: -7%). With CPI inflation intensifying, it’s our forecast that the RBNZ will continue lifting interest rates even as economic momentum (and housing) fade. That’s a dynamic that may surprise some kiwis, but central banks must defend their inflation targets (and credibility) at all costs. It may not take much for our expectation for a relatively soft landing in housing to surprise on the harder side.
February 2022: At your service (PDF 1.50MB)
How much will OCR hikes hurt household balance sheets? The answer to this question is a function of three key factors: the degree of interest rate rises, growth in household incomes, and growth in household debt. We put all these together on a path consistent with our broader economic outlook to investigate the likely looming change in household debt burdens. There are certainly tougher times ahead for borrowers, but based on our forecast for a 3% OCR, we don’t yet see flashing red lights. However, our aggregate analysis likely understates debt concentration risks. That is, there are a lot of highly indebted recent first home buyers out there who will feel the pinch of rising rates a lot more than the average mortgage borrower.
Bluestone Quarterly Lending and Property Snapshot MAY 2022
https://www.bluestone.net.nz/wp-content/uploads/2022/05/Lending-Report-MAY-2022_FINAL.pdf
Home lending growth has slowed considerably in March and the first quarter of 2022, in line with easing housing market activity. The moderation is sharp compared to the previous year, but loan commitment growth is above levels seen in March between 2014 and 2020. A range of factors are slowing credit growth including regulators, the Credit Contracts and Consumer Finance Act, reduced housing market turnover, less tolerance for risk across banks and buyer caution. Double-digit credit growth is not sustainable. Non-banks continue to increase their market share of home lending.
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