Slowdown arrives for New Zealand’s hot property market

New Zealand’s overheated property market looks to be slowing down thanks to rising interest rates and lower demand according to a new report.

CoreLogic NZ’s latest Property Market & Economic Update shows rampant price growth has eased off, however there’s unlikely to be any “significant” falls in property values.

CoreLogic Chief Property Economist Kelvin Davidson said property value growth rates had softened, with the national average only up 0.7 per cent in March, the lowest figure since values dropped 0.2 per cent in August 2020. 

“It’s important to acknowledge these are still increases at the national level,” Mr Davidson said.

“But the momentum has certainly shifted, and some key areas saw values drop in March, including Hamilton, Wellington, Christchurch, and Dunedin.

“The rest of the year is likely to remain soft for property values too, as mortgage rates rise, credit remains tricky to secure, and buyers have more choice of listings. 

“However, if unemployment stays low, we don’t anticipate significant or widespread falls in property values.”

The quarterly increase of 3.6 per cent was the smallest quarterly rise since the 1.9 per cent hike in the three months to October 2020.

The annual growth rate has also slowed to 23.4 per cent. 

Mortgage rates in New Zealand jumped sharply last year with the report suggesting they could reach 6 per cent.

Mr Davidson said many households would be forced to adjust their finances fairly quickly, following the doubling of mortgage rates and the country’s high household debt-to-income ratio.

“To be fair, the worst point for mortgage finance may already have been seen, given that the Credit Contracts and Consumer Finance Act (CCCFA) is set to be loosened, and some banks are reportedly relaxing in-house rules around debt-to-income ratio caps and the availability of low deposit finance,” he said. 

“But it’s still going to be harder to get a new mortgage this year than it has been for some time, and there’s also a large refinancing wave to come through too, with about 50 per cent of existing loans fixed but due to roll over this year. 

“These borrowers will generally be facing a much higher repayment schedule when they refinance.”

As the slowdown has emerged more clearly in the housing market so too has mortgage lending activity, which has fallen year-on-year for the past six months in a row, with February’s total of $5.7 billion down $1.9 billion on the same time last year. 

Mr Davidson said the investor lending slowdown was the key driver of overall trends, but owner-occupier lending had also cooled recently, especially with the reduction in the low deposit lending speed limit on November 1 from 20 per cent of activity to 10 per cent. 

As a result of higher borrowing costs, property sales volumes in the first quarter of the year were the weakest in about a decade. 

“Higher mortgage rates and reduced credit availability is having a significant impact on sales,” Mr Davidson said.

“We expect property market activity will continue to be subdued, with sales volumes perhaps declining by as much as 10 per cent this year, and another 5 per cent or so in 2023. 

“This is best characterised as a slowdown though, rather than a serious downturn.”

The changing market conditions hit first home buyers hardest, with the group making up 23 per cent of purchases in the first quarter, and 21 per cent in March.

Mr Davidson said the abrupt shift started in January, reflecting November’s tightening of the loan-to-value ratio (LVR) rules and December’s CCCFA law changes.

According to the report, the common drivers of the widespread post-Covid upswing in property values, including low mortgage rates and tight supply, are no longer in play.

The total number of listings available has also jumped due to the slowdown in sales activity. 

Mr Davidson said the next phase of the cycle was expected to result in a sharp and widespread slowdown in property value growth. 

“There is also likely to be some regional divergence, with some parts of NZ more vulnerable to falls in values than others, while some may actually see further growth,” he said. 

“There are many factors that will influence each region over the coming year or so. But parts of Canterbury certainly have affordability on their side, so could see further, albeit modest, growth. 

“By contrast, many smaller markets in the central and lower North Island already look stretched, so could be poised to underperform.”