Is New Zealand’s housing market about to recover? Too soon to tell, or an indisputable fact?

In recent weeks, numerous news reports have claimed that New Zealand house prices have bottomed out and the housing market is about to recover. Some commentators argue that interest rates have peaked, net migration is taking off again, and the number of properties for sale has fallen noticeably. But we cannot help asking: will the effects of these positive factors on the housing market last, or will they be short-lived? In this article, YIJU takes a closer look at how credible these recent housing market predictions really are.

 

Conclusion 1: Has the OCR peaked?

 

We know that house prices surged after the official cash rate (OCR) was cut to a record low of 0.25% during the pandemic. But in May this year, the OCR was raised by 0.25%, while its forecast peak remained unchanged at 5.5%. With lending restrictions imposed by the Reserve Bank of New Zealand now suspended, banks can offer mortgages to more borrowers with deposits below 20%. ANZ economists have declared that house prices have bottomed out, pointing to declines in some commercial banks’ longer-term fixed mortgage rates in recent months and wholesale markets pricing in future interest rate cuts.

 

However, ANZ noted in its May Property Focus report that bringing inflation under control would be a difficult task. The bank’s economists expected that by November, the Reserve Bank would have to raise the OCR by another 0.25%, meaning interest rates may not yet have peaked.

 

Conclusion 2: Has the total number of property listings fallen substantially?

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CoreLogic data shows that the total number of properties currently on the market is just under 35,000, down from 37,000 in March and a peak of 40,000 before Christmas last year. The total number of properties for sale is around 13% below last year’s peak.

 

However, CoreLogic head of research Nick Goodall says this figure remains well above the average of recent years. For example, in 2021, the number of properties for sale fell by 12,000. Therefore, although total listings have fallen, buyers still have more choice.

 

Conclusion 3: Is net migration rising rapidly?

The latest data released by Stats NZ shows that in the year to March, net migration increased by 65400 people. QV’s Simon Peterson says increased net migration will not become a driving force behind a housing market revival overnight. A sudden influx of migrants may have a delayed effect because new arrivals face policy restrictions on buying a home when they first come to New Zealand. More arrivals mean greater demand for housing, particularly rentals, yet New Zealand rents have remained flat for three consecutive months.

 

In March, Trade Me’s median asking rent was NZ$600 per week. Over the same period, Ministry of Business, Innovation and Employment data put the median rent at just NZ$560 per week. This suggests rents may have reached the limit of what the market can sustain.

 

Conclusion 4: Has the pace of house price falls slowed?

Take CoreLogic’s data, for example. It found that average New Zealand house prices fell by 0.6% in April, a slower decline than in February and March, when prices fell by 1%. This led its chief property economist, Kelvin Davidson, to suggest that prices might be very close to bottoming out.

 

Unfortunately, prices fell by 0.7% in May, a larger decline than in the previous month. This was not the first time recently that the pace of price falls had slowed before accelerating again. In December, CoreLogic economists found that prices fell by just 0.2%, far less than the 0.6% decline in November and the 1.3% decline in October. However, the pace of house price falls accelerated again in January.

 

Conclusion 5: Will easing LVR restrictions help the housing market recover?

 

The Reserve Bank of New Zealand’s decision to remove all loan-to-value ratio restrictions (LVRs) in 2020 is widely regarded as having fuelled the pandemic-era home-buying frenzy. Although LVR restrictions were reintroduced in 2021, considerable damage had already been done to the housing market, which remained gripped by FOMO, or fear of missing out. Compared with the Reserve Bank’s previous controversial manoeuvres, last Thursday’s policy change looks more like fine-tuning: from 1 June, commercial banks can increase the share of new lending to borrowers with deposits no greater than 20% from 10% to 15% of all new lending. They can also lend 5% of new lending to investors with deposits below 35%, compared with the previous minimum deposit requirement of 40%.

 

Commentators agree that this change is unlikely to have a significant impact on the housing market, and is unlikely to produce the artificial market stimulus seen when the Reserve Bank previously removed LVR restrictions altogether.

 

Conclusion 6: Are buyers becoming more optimistic?

For a period in late 2020 and early 2021, independent economist Tony Alexander’s surveys of real estate agents found that around 90% of buyers were experiencing FOMO. This year, that figure has fallen to between 4% and 7%. Meanwhile, the proportion of buyers experiencing FOOP, or fear of overpaying or seeing their property lose value after purchase, remains substantial. Since March 2022, FOOP has been the foremost concern for 60% to 70% of buyers. In April, it remained high at 68%, indicating that buyers still consider market prices too high.

 

This result is unsurprising: inflation remains high at 6%, more than twice the target, and the prospect of recession still looms. Around 58% of real estate agents and buyers believe house prices will continue to fall.

 

An approaching ‘turning point’: the October election

 

Many factors influence New Zealand’s housing market, including lending rules, interest rates, and supply and demand. But people may be overlooking the biggest factor: the October election. There are growing signs that sellers, particularly investors, are holding their properties back from the market. Many are hoping National will return to power, but if Labour remains in government, they will not hesitate to sell their investment properties.