Still no bottom after 4 and a half years of decline? New Zealand’s housing market faces its worst correction in 46 years, with two new election uncertainties

Without a recent Stuff report, many people might not realise that New Zealand’s housing downturn has now lasted a full 4 and a half years, becoming the most severe property market correction in almost half a century.

This downturn has lacked the distinct sense of a crash seen during the 2008 global financial crisis. There has been no wave of financial institutions running into trouble, nor have house prices plunged within a few months. Instead, prices have fallen in fits and starts, right through to today.

But over the longer period, the scale of the decline is striking.

The worst housing market correction in 46 years

Stuff cited a new analysis of more than 75 years of property data by Infometrics managing director and chief forecaster Gareth Kiernan, which found that New Zealand’s real house prices have fallen about 27% from their peak after adjusting for inflation.

In real house price terms, this is the largest property market correction in 46 years.

Across more than 75 years of historical data, only the downturn from September 1974 to December 1980 was more severe, with real house prices falling by about 38% in total.

By comparison, real house prices fell about 9.4% during the housing correction from 1984 to 1986, and about 15.8% after the global financial crisis.

The current decline has clearly exceeded both.

Why have many people not felt this particularly strongly?

One reason is that the house price figures people usually see do not account for inflation. New Zealand’s nominal residential property prices are currently about 17% below their peak. But allowing for increases in prices and incomes over recent years, the loss in property’s real value is much greater than 17%.

Another reason is that house prices rose so rapidly from 2020 to 2021. For many people, the declines of recent years feel more like an unwinding of the pandemic-era frenzy.

For those who bought around 2021, however, it is a very different story.

2021 may have been one of the worst times to buy in 70 years

Kiernan believes that, for some buyers, the period around 2021 may have been one of the worst times to buy a home in the past 70 years.

He offered a simple example.

A home bought for NZ$1,000,000 in 2021 might cost only NZ$850,000 today.

Someone buying now could borrow NZ$150,000 less and, after several years of wage growth, might also earn more than a buyer in 2021.

Conversely, someone who bought for NZ$1,000,000 with a deposit of NZ$200,000 would have lost NZ$150,000 in value on paper if the home is now worth only NZ$850,000. That is equivalent to three-quarters of their original NZ$200,000 deposit.

And many people bought when prices were high.

Infometrics data shows that around 48,000 first-home buyers entered the market during the high-price period from June 2021 to December 2022 alone.

Many of them are still dealing with the consequences of those high purchase prices today.

After a modest improvement early this year, prices are falling again

What really concerns the market is not how far prices have already fallen, but the absence of a clear turnaround after 4 and a half years of decline.

On 10 August, QV released its latest House Price Index.

At the end of July, New Zealand’s average residential property value was about NZ$898,800, down another 1.5% over the preceding three months. Auckland fell 2.2%, while Wellington City declined 3.2%.

QV spokesperson Simon Petersen believes this is not another sudden market correction, but an already subdued market losing the modest momentum it had built up early this year.

This is a development in the current housing market that deserves close attention.

The familiar property cycle used to work like this: interest rates rose and house prices fell; the Reserve Bank of New Zealand cut rates and mortgage rates eased; buyers returned and house prices gradually recovered.

This time, the process has been less smooth. Sales volumes have recovered from their 2023 lows, but house prices have largely failed to follow.

An important reason is that there are still plenty of homes on the market. With ample choice, buyers have no need to rush and can take their time comparing properties and negotiating prices.

More troublingly, some fixed mortgage rates have recently started rising again. Following the earlier round of rate cuts, the Reserve Bank of New Zealand raised the OCR by 25 basis points in July, changing expectations that mortgage rates would keep falling. Add employment conditions and the economic outlook, and the question for many households is no longer simply whether a home is affordable, but whether they feel confident taking on a mortgage lasting twenty or thirty years at this point.

With the election approaching, two property policies deserve attention

With the housing market still not fully settled, the 7 November general election adds fresh uncertainty.

Historical experience suggests elections usually have a limited effect on house prices themselves, but a more noticeable impact on sales volumes.

During the 2014 and 2017 elections, property sales activity fell to about 85% of normal seasonal levels.

The reason is practical: if tax and property policies could change within a few months, some buyers and investors will choose to wait for the result.

Two policies deserve particular attention this year.

The first is the land value tax proposed by The Opportunities Party.

The party advocates an annual land tax of up to 1.75%, including on family homes. By its own estimates, implementation could lower house prices by 10% to 15%.

However, that does not mean house prices would necessarily fall that much further. These are the party’s own calculations, and even if it enters Parliament, implementation would depend on the election result and subsequent coalition negotiations.

The second issue could affect property investors more directly: whether Labour will change mortgage interest deductibility for investment properties again.

Rental property owners can currently deduct eligible mortgage interest as an expense. The previous Labour government progressively removed this policy, and the current Government later restored it.

Labour has not yet finalised its next steps. If the rules are tightened again after the election, annual holding costs would be affected for landlords with higher levels of borrowing.

The election’s biggest impact on property this year may therefore come after the vote, rather than on 7 November itself.

The housing market may not truly bottom out until 2027

After 4 and a half years of decline, has New Zealand’s housing market finally reached the bottom?

Kiernan believes that nominal prices may not fall much further, but real house prices could still have room to decline once inflation is taken into account.

In his assessment, this correction in real house prices may not truly end until the first half, or even the middle, of 2027.

However, the prolonged decline has also brought a change that was difficult to achieve over the past few years.

New Zealand’s house-price-to-income ratio once reached about 8.3 times income and has now fallen to around 6. Although homes are still far from cheap, the gap between incomes and house prices is narrowing.

For those who bought at the peak in 2021, these 4 and a half years have undoubtedly been difficult. For those preparing to buy their first home, conditions are gradually becoming more favourable.

Over the coming months, mortgage rate movements, a possible increase in spring listings, whether buyers continue to wait ahead of the election, and potential changes to property tax policy afterwards all warrant attention. The sharpest falls in this housing downturn may be over, but after 4 and a half years of decline, it is probably still difficult to say whether New Zealand property has truly reached the bottom.

Do you think New Zealand house prices have bottomed out? Will this spring bring a genuine rebound, or will the correction continue into 2027? If property tax policies change after the election, would you choose to buy now, sell, or keep waiting?