Property boom hasn’t helped owner-occupiers

Despite property prices rising at a rapid rate in the past two years, a leading economist said the house price boom hasn’t necessarily been a good thing for all owner-occupiers.

Reflecting on the lessons learnt over the course of the pandemic, CoreLogic‘s Chief Property Economist Kelvin Davidson said that despite house prices rising by 41.6 per cent in New Zealand since August 2020, owner-occupiers had not necessarily come out ahead.

“Housing market booms aren’t necessarily always ‘good’ for many owner-occupiers, in particular those looking to trade up to a bigger property,” Mr Davidson said.

“Over the past two years, many would-be movers have been stuck where they are, either because they’ve had little suitable stock to choose from (listings low), or the financial/equity gap that needs to be closed in order to make the move has been too great, as the ‘next homes’ have sometimes risen faster in value than theirs.”

On the back of record-low interest rates and fiscal policies aimed at stimulating property values, New Zealand has seen staggering house price growth according to Mr Davidson.

“By territorial authority area, three areas have seen post-COVID growth in average values in excess of 60 per cent (Wairoa, South Wairarapa and Tararua), another 16 have had increases of at least 50 per cent, and only one has been less than 25 per cent (MacKenzie at 16.4 per cent),” he said.

Mr Davidson said the sharp price rises had led to increased levels of unaffordability across the country, which would likely temper demand.

“That upswing is now quickly giving way to a sharp slowdown, and as affordability constraints bite, mortgage interest rates rise, and credit availability tightens, outright falls in property values in some parts of the country could well be on the cards in the coming months,” he said.

“In other words, we now seem to be quickly shifting into a ‘buyer’s market’.”

Mr Davidson noted another key takeaway from the pandemic had been a drop in demand for apartments.

“Apartments often tend to lag behind the other property types, seeing smaller rises in value than houses (and flats) during upswings, and sometimes bigger falls in downswings,” he said.

“The reasons for this differ from cycle to cycle, but the end result is typically the same.

“In the post-COVID world, excluding apartments in Auckland City and North Shore, all other property types and locations have seen large increases.

“Apartments in Auckland City, and the North Shore too, have been relatively subdued, only seeing growth in median values of 5-10 per cent over the past two years.

“That’s likely to have reflected the particular pressures in those areas from the absence of foreign students and the weak short-stay accommodation market (without tourists).”

According to Mr Davidson, easy credit and low interest rates are bigger drivers of house price growth than population and new stock.

“Credit availability and cost matter more for the market over shorter horizons than other ‘fundamentals’ like population growth or housing stock changes – indeed, without net migration in the past year or two, and with new housing supply also strong, property values have still soared,” he said.

“Why? We’ve had low interest rates and mortgages have been relatively easy to get, especially while the LVR limits were temporarily removed from April 2020 to March 2021.”

Mr Davidson said low interest rates also disincentivises people to save.

“Low interest rates have a two-pronged influence on housing – making it cheap to borrow, but also reducing the incentive to hold cash in the bank,” he said.

“The post-COVID outflow of money from term deposits and into property highlights once again that kiwis need more ‘trusted’ investment options, and perhaps carrots to look at them rather than sticks for property. 

“For example, tax breaks on KiwiSaver deposits could be an option.”

Mr Davidson said that the ability to afford a home is also a good indicator of how much price growth is left in the market.

“Housing affordability measures help to tell us where the market currently sits (relative to history, and certain regions against others) and unaffordability is clearly a handbrake on price growth over time,” he said.

“But these measures don’t necessarily tell us that the upswing will end when the house price to income ratio reaches X or years to save a deposit hits Y – nor how the adjustment back to ‘normal’ will play out.

“Take years to save a deposit for example. It peaked at 9.4 in Q4 2016, a mark reached again in late 2020/early 2021. 

“But the latest upswing then rolled on through 2021, simply extending that measure ever higher.”

Show More

News Room

If you have any news for the Real Estate industry - whether you are a professional or a supplier to the industry, please email us:

Rowan Crosby

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