New Zealand property prices face a test as interest rates rise and sales volumes fall

The New Zealand property market will be tested as rising interest rates and a wave of refinancing jolt the market in the next 12 months.

According to CoreLogic NZ’s latest Property Market & Economic Update, sales activity continues to fall and fuel lower property prices.

CoreLogic NZ Chief Property Economist Kelvin Davidson said it had been a weak start to 2022 with lower sales volumes allowing stock levels to replenish.

He said the power balance had swung in favour of buyers.

“As yet there hasn’t been an abnormally large rise in new listing flows, but this is certainly a risk we’re keeping an eye on as financing costs continue to increase and the returns on other assets rise too,” Mr Davidson said.

“The sharp post-COVID upswing in values has now given way to a firm correction, and the falls already seen to date have been spread across most geographical areas and price brackets.

“It’s possible the national average property value will ultimately drop 10 per cent to 15 per cent by the middle of 2023, which broadly suggests we’re potentially halfway through this correction in both duration and scale.”

Source: CoreLogic NZ

The total value of residential real estate fell to $1.69 trillion at the end of Q2 2022, down from $1.73 trillion at the end of 2021.

Mortgages are secured against 20 per cent of that value, and the other 80 per cent is household equity.

It’s been more than a decade since a similar drop in sales activity was recorded Mr Davidson said, noting days on market had also increased as buyers hold the balance of power with plenty of stock to choose from.

“The rest of 2022 and into 2023 looks set to remain a testing time for market activity levels,” he said.

“The economy remains a little fragile, net migration could stay relatively subdued, even as the borders fully reopen, and on top of that, credit conditions remain restricted and mortgage rates continue to rise.

“All of these factors point to further downwards pressure on property sales.”

As the Credit Contracts and Consumer Finance Act (CCCFA) rules ease, Mr Davidson said more people would be able to access credit and enter the market, however it was unlikely to move the needle significantly, with 2022 total sales projected to be around 78,000.

Last year 94,000 properties changed hands.

Falling values

New Zealand’s property values have fallen for three consecutive months to an average of $1,018,770, down 2.3 per cent from the peak.

Annual growth rates have slowed to 12.4 per cent.

“There are multiple reasons contributing to a slowdown in values, these include more listings, a shift in pricing power towards buyers, a tighter mortgage lending environment, and sharply higher interest rates,” Mr Davidson said.

“This weaker phase for the property market looks set to continue into 2023, and even when the floor is reached, the experience of the Global Financial Crisis (GFC) was that it took another two to three years for the next upswing to start as values plateau.”

Source: CoreLogic

Inflation rates, economic health and the official cash rate (OCR) will be key influences on New Zealand’s property market in the next 18 months, Mr Davidson said, warning that recession risks were still prevalent and any signs of rising unemployment would have an adverse impact.

“Should the economy start to feel the pinch of tighter monetary policy sooner than the Reserve Bank of New Zealand expects, the OCR may not need to go all the way to 4 per cent, which would also tend to limit the peak for mortgage rates,” he said.

“That said, offshore rates matter too, and the key point is that mortgage rates are still likely to have further to rise yet.

“Overall, the property market is clearly in a very different phase than we’ve seen for several years, with sales volumes low and values falling outright.

“Provided unemployment levels remain low in the range of 3 to 4 per cent the market should stay in a correction phase rather than moving into a serious slump.”

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Rowan Crosby

Rowan Crosby is a freelance journalist specialising in finance and real estate.