New Zealand home prices rise as rates rise
Anne Bate felt “crazy” trying to downsize in the midst of a global pandemic. But selling your home in the paradise of Pahi fishing village, northwest of New Zealand’s North Island, proved to be the easy part.
It was in Timaru, his destination some 1,360 km away on the South Island, where Bate experienced the other side of the market. “It was kind of early and dead,” she said. Even as a cash buyer she said it was a “miracle” that she managed to find a place and be closer to her grandchildren.
New Zealand is having one of the biggest property booms in the world. A relative safe haven, the average home price has increased by 43 percent over the past two years, according to Sense Partners, an economics consultancy, with comparatively fewer cases of Covid-19.
This has left buying a home beyond the comprehension of many Kiwis. With the average home price now ten times the average annual income, the government and central bank have struggled to find ways to cool the market without triggering a crash.
The country is an extreme example of what happened to the housing markets during the pandemic. Prices have risen from Canada to Australia since the first quarter of 2020, when policymakers introduced fiscal and monetary stimulus. Meanwhile, wage increases have been more modest.
Now, as inflation takes hold around the world, buyers and sellers are waiting to see what the removal of stimulus from central banks and governments and a range of rates will do for the housing market and the broader economy.
The Reserve Bank of New Zealand began tightening monetary policy last October after an 18-month hiatus, during which its benchmark cash rate stood at just 0.25 percent. The rate has been raised sharply to 2 per cent and reaches 4 per cent within a year as the bank tries to chase inflation – now around 7 per cent – out of the system.
“To some extent, New Zealand is a canary in the coal mine,” said Kelvin Davidson, CoreLogic’s chief asset economist in Wellington. “This is a test case for the central bank to raise rates as house prices continue to rise to combat inflation.”
Due to its ability to keep COVID-19 under control for the pandemic, New Zealand has had less recession than other economies. Relatively strong growth – and a change in the mandate of monetary policymakers so that they face any risks that house prices present to financial stability – mean that central banks are among the first to act on signals. One was the economy is heating up.
The impact of those increases, which are accompanied by tighter loan terms, such as reducing the amount of high-risk mortgages with lower loan-to-value ratios, are being felt deeply in the housing market.
Estate agent Barfoot & Thompson expects sales volume to drop to about 60 percent of the level seen last year. “Home prices in New Zealand are falling and all signs point to further declines in the coming months,” said Ben Udi of Capital Economics. He now expects a sharp drop in house prices to reach 20 per cent, more than double his previous prediction.
But even a drop of 20 per cent will take home prices back to 2020 levels. The real risk to New Zealand’s economy is that a boom in homes and low rates have dramatically reduced spending to protect assets.
Shamoubil Eikub, an economist at Wellington-based Sense Partners, has calculated that housing assets have increased by NZ$460bn, or $295bn, during the pandemic. New Zealand’s GDP in 2021 was NZ$350bn.
New Zealand is a particular example of an economy where “consumers are more sensitive to home prices than elsewhere”, Udi said.
With central banks now raising rates around the world – and with further tightening expected in the coming months – a big question is whether other markets will follow New Zealand.
Estate agents remain optimistic. “While the market will slow down, I don’t think we are going to see a drop in prices globally. The rate of price growth will decline and soften over the next few months,” said Kate Everett-Allen, partner and head of international residential research at Knight Frank.
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Economists are more skeptical. Ines McPhee, chief global economist at Oxford Economics, saw a period of “very weak price growth” ahead, as higher rates raised mortgage costs. Vicky Redwood, a senior economic advisor at Capital Economics, expects prices to fall in the UK, Australia, Canada, Sweden and Norway, along with New Zealand.
Some New Zealanders see a silver lining in the bursting of a housing bubble that has left many struggling to climb the property ladder. According to eCub, home ownership is at its lowest level since the 1950s. He said about 4 percent of New Zealand’s tax revenue is spent on housing assistance.
Tobias Oetting, a 29-year-old consultant at CoreLogic who wants to buy a home in Wellington with his partner, has seen a standoff between sellers trying to keep prices stable and buyers looking for prices in the impending fall. “The reality is coming in. It’s a buyer’s market now,” Oetting said. “We have the luxury of being patient.”
