Rising rates cool New Zealand property prices

Rising interest rates are continuing to put pressure on home prices in New Zealand, with the latest data from CoreLogic showing values fell another 1.3 per cent in October.

The decline in October was slightly less than the 1.5 per cent fall in September.

CoreLogic NZ Head of Research, Nick Goodall, said the biggest constraint on the housing market right now is affordability, with potential buyers stretched by both increasing mortgage interest rates and the more stringent serviceability buffers.

“The latest CPI inflation figures for Q3, which shocked all predictions coming in at 7.2 per cent annual growth, led to an across-the-board upward adjustment of OCR (official cash rate) forecasts,” Mr Goodall said.

“Assuming the RBNZ follow suit on 23 November, the OCR will move to 4.25 per cent, which could see the floating rate approach 8 per cent and the one-year fixed rate top 6 per cent.

“This will likely lead to a lot of belt tightening by mortgage holders – the exact desired effect the RBNZ wants.

“For now, the impact has been manageable and limited, but with each OCR hike comes a heightened risk of a deeper and longer recession and with it growing unemployment and financial stress.”

Mr Goodall said the current downturn is on pace with the GFC in terms of the speed and magnitude of price declines.

“This market downturn continues to compare unfavourably to the last major downturn, following the Global Financial Crisis in 2008,” he said.

“The national quarterly rate of fall at the end of October of -4.5 per cent now exceeds the worst quarter from that period, which was -4.4 per cent at the end of August 2008. 

“The annual rate of change has now fallen into the negatives (-0.6 per cent), only a year after experiencing the strongest rate of growth on record (28.8 per cent in the year to the end of October 2021).”

Property values continued to fall across all four main centres in the North Island in October with Wellington yet again continuing to experience the weakest performance. 

Values across the broader capital area (including the Hutt and Porirua) fell a further 2.6 per cent over the month, although the quarterly fall of 7.5 per cent was a slight improvement on the three months to end of September (-8.5 per cent). 

The annual fall has grown to -13.1 per cent, extending the record for the region, first broken last month. 

Both Christchurch and Dunedin saw reductions in the rate of value falls over the month, in Dunedin’s case back to 0.0 per cent, from -1.7 per cent in September. 

“It’s too early to call the end-game for the southern city however, with persistent monthly falls below -0.5 per cent since February 2022 and the quarterly drop of -4.2 per cent illustrating a more relevant trend of a market in retreat,” Mr Goodall said.

“Affordability will once again be a factor in these markets experiencing particular weakness, with both Wellington and Dunedin seeing strong growth in the run-in to the onset of the pandemic – notably in the latter half of 2019.

“For the other main centres in the North Island, values are now lower than they were a year ago for the first time since this downturn began.”

In Auckland, after a minor improvement in the quarterly rate of fall in September (to -4 per cent), the rate deteriorated again in October (-4.8 per cent) illustrating continued uncertainty and weakness in New Zealand’s largest city.

“The weakness across the Wellington region is persistent and continuous, with Lower Hutt in particular seeing large falls, down 3.1 per cent over the month, -9.5 per cent over the quarter and -16.8 per cent over this time last year,” Mr Goodall said. 

Despite a diverse city of property types, locations and prices, the relative weakness across Auckland was evident everywhere in October, with values falling across the board, from -1.3 per cent in both the North Shore (average value $1.52 million) and Franklin ($980,000) to -2.2 per cent in Papakura ($1 million). 

On the longer-term annual measure, the smaller outer areas of Rodney, Papakura and Franklin held up better, with average values in these areas remaining above the same time last year. 

Meanwhile, in regional areas results were mixed with mini-bounces in value occurring in both Nelson and Gisborne after prior monthly falls. 

“Values remain down on the quarterly measure everywhere except Queenstown, but New Plymouth has shown similar resistance to the adventure capital of the world with values still 10 per cent above the same time last year,” Mr Goodall said. 

“Nelson (-1.6 per cent) and Whanganui (-1.3 per cent) have joined Napier (-9.1 per cent), Palmerston North (- 7.8 per cent) and Hastings (-4.8 per cent) as main urban areas where the average property value is now below the same time last year.”

Looking forward, if the RBNZ decides to hike the OCR by 0.75 per cent a the upcoming meeting, it would put even more pressure on property prices, according to Mr Goodall.

“All banks have revised their house price forecasts down in the wake of the latest data and if we assume an 18 per cent fall from peak-to-trough, that would take the average price to $855,000, still a lot higher than March 2020,” he said.

“The average value prior to the pandemic hitting our shores in Feb 2020 was $723,000. To get back to that value would necessitate a 31 per cent fall – not something anyone is forecasting, yet.”

Mr Goodall said while some segments of the market, such as first home buyers, are fairing OK, investor confidence is down.

“Time will tell whether the latest data releases and upcoming decisions and commentary will be enough to rein in spending and encourage more saving to produce a meaningful reduction of inflation – if not, the RBNZ’s job is going to get much more complicated,” he said.

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Rowan Crosby

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