New Zealand could be on the cusp of a Global Financial Crisis-like property market downturn with “little respite” for falling house prices in the coming months, according to an industry expert.
CoreLogic New Zealand Head of Research Nick Goodall said nationally property valued fell 0.8 per cent in June, which was the third consecutive month with a drop at that rate.
The House Price Index (HPI) also showed the quarterly fall of 2.3 per cent was the biggest three-month decline since February 2009, which is just before the market bottomed out after the GFC.
“As the downturn sets in, and with interest rates set to rise further, greater consideration is now being given to ‘how long and how far will this go’,” Mr Goodall said.
“Of course no one knows for sure but the long recovery after the GFC offers a glimpse into one potential scenario which could unfold.”
Post GFC, Mr Goodall said the market took the shape of a “bathtub”, with a gradual initial decline of 9.9 per cent over 17 months, followed by a period of relatively flat conditions, before increasing back to the pre-GFC peak five years later.
“While the economic and lending environments are remarkably different between 2008 and 2022, housing affordability is more thinly stretched, and interest rates are rising, not falling like in the late 2000s,” he said.
“Under these circumstances it is difficult to foresee any respite for falling house prices in the near term.
“Affordability constraints coupled with higher interest rates and tighter lending conditions are likely to keep a lid on housing demand over the coming months and probably until interest rates start to fall again.
“Although a drop in housing prices will support an improvement in affordability, higher mortgage costs and stricter lending policies will probably outweigh the renewed affordability advantage.”
Auckland recorded the biggest drop in property values in June, with the HPI recording a 1.9 per cent fall for the month and a 4.9 per cent decline for the quarter.
The average value of a property in Auckland is now $1,445,624.
But Mr Goodall said the figures needed to be viewed in context of market changes.
“When it comes to property values in Auckland, it’s important to look past median sale prices as they are often affected by a change in the mix of properties reaching agreement over the two periods being analysed, whereas an index measures all properties in an area regardless of whether they have transacted,” Mr Goodall said.
“In other words, Auckland could see more expensive standalone dwellings dominating sales in a given month, but then cheaper townhouses might take over the next month.”
The HPI showed Christchurch recorded the most growth in property values in June, up 2.6 per cent to $783,216, followed by Hamilton with a 1.8 per cent jump to $880,947.
However, Wellington, Dunedin and Tauranga all recorded similar falls to Auckland.
Outside the main cities, few areas are showing consistent growth.
Hastings recorded 1.1 per cent growth in property values in June, but remains 2.7 per cent down for the quarter, while Whanganui property values rose 0.7 per cent in June but are still 2 per cent down for the quarter.
Gisborne recorded the biggest monthly decline at 3.2 per cent, followed by Lower Hutt at 2.8 per cent.
Mr Goodall said on top of the affordability constraints already mentioned, for those already in the market, they’re now having to deal with the increased costs of higher interest rates.
“Those rates are rising quickly, as if scaling the steepest parts of Mt Ruapehu,” he said.
“But while the lending environment, including the tightest loan-to-value ratio limits on record for owner occupiers, is likely to keep a lid on demand for property at 2021 prices and lead to further, gradual falls in values, there are a number of guardrails in place which should protect the market from an outright crash in values.
“Firstly, and probably most importantly, the tight labour market and historically low unemployment rate are expected to remain.
“As long as borrowers can retain their jobs and income they’re likely to adjust their discretionary spend in order to maintain mortgage repayments. This is as opposed to mortgage stress leading to heavily discounted or worst-case mortgagee sales.
“Mortgage serviceability tests applied at the time of origination, alongside many borrowers getting ahead of their repayment schedules will provide another buffer against potential trouble too.”
For investors, facing a more heavily regulated market, similar affordability pressures to owner occupiers and the full force of inflationary pressures, the finances are becoming harder to stack up.
“Given the hurdles to acquire funding such as lending limits are higher, the cost of money (mortgage interest rates) is increasing and the cost of housing such as values, maintenance costs and reduced tax benefits is also high, many investors (or would-be investors) simply won’t be able to justify adding a property to their portfolio,” Mr Goodall said.
“Some investors may be comfortable ‘topping up’ their property out of other income for a period of time, but that has a limit.
“Furthermore, if we do indeed see a ‘bathtub’ shaped recovery play out, expectations of short-term capital growth should also be tempered, leaving investors focused on a long-term horizon, and/or on short-term yield.”