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New Zealand house price crash: Property slides as average price plunges below magic $1m mark

By Ryan Hogg

Edited by Jekaterina Drozdovica

16:27, 29 September 2022

Traditional residential houses at Mount Victoria in Wellington, New Zealand
Property slides as average price plunges below magic $1m mark – Photo: Shutterstock; Trabantos

House prices in New Zealand dipped below the average of NZ$1m last month, in the latest sign that the country’s once-booming New Zealand housing market could be in for a tough time.

Rising interest rates meant to fight inflation are also working to reduce affordability for homeowners and buyers alike, in a move analysts increasingly expect to trigger a drop in prices. But is this the beginning of a New Zealand house price crash?

What is a housing crash?

Housing markets tend to move in line with the economic fortunes of their country. Income growth usually improves confidence, increasing the demand for home buying. Meanwhile, homeowners see their asset wealth improve, increasing their confidence and boosting demand.

When an economy contracts, it’s not always followed by a steep drop in house prices. For example, the recession that met the onset of the Covid-19 pandemic saw house prices increase.

Also, population growth that hasn’t been met by homebuilding in many countries further distorts the relationship between the economy and housing. Accordingly, it isn’t easy to predict when a housing crash may occur.

A housing crash marks a sudden and deep contraction in property prices, usually as a result of an exogenous shock. It tends to occur across a nation but can spread internationally if it begins in a large market.

These shocks can include the fallout of financial contagion and speculation, as was the case during the global financial crisis of 2008/2009. This was combined with widespread levels of low creditworthiness among buyers, which meant many were eventually unable to afford their homes as conditions worsened.

While more lending safeguards are embedded in modern systems to avoid a similar situation, analysts are now on the lookout for a housing bubble that could be popped by rising interest rates. 

Interest rate increases can cause an NZ house price crash by fundamentally altering the status quo. Higher base rates set by a central bank affect the mortgage rates offered by commercial banks. That increases monthly borrowing costs for homeowners with mortgages, and could make mortgage repayments unaffordable, forcing them to put their homes on the market.

At the same time, prospective homebuyers could be priced out of the housing market by the higher costs, conspiring to reduce demand for housing at the same time as supply is rising, forcing prices down.

Because rising interest rates are a sign of contractionary monetary policy, the impact on an economy, which can include recession, rising unemployment and falling incomes, could further increase the supply of housing while reducing demand. 

House price history in New Zealand 

New Zealand’s housing market has been relatively stable over its history. The country experienced a contraction during the onset of the Great Recession of 2008/09, but it wasn’t as severe or as long as other developed nations like the UK and US, as prices fell around 6% between 2008 and 2009.

New Zealand real estate prices saw consistent growth since then as the market enjoyed economic stability and the rising incomes and confidence that came with it. The market was encouraged rather than deterred by the Covid-19 pandemic, with prices rising by 10% in 2020 and 26% in 2021. 

Now though, it would appear that a shifting financial context is beginning to feed into the country and could foreshadow an NZ house price crash. 

Prices have been falling on a monthly basis since January 2022, data from QV showed, with average house prices down 5.5% in the last three months. 

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REINZ CEO Jen Baird observed that median prices fell 5.9% annually in the country since last year, even though some bright spots remained: 

“Despite the median property price easing across the country and supply increasing, sales activity remains subdued. These positive aspects for buyers are offset by higher mortgage rates as rising interest rates and concern around inflation continue to put the brakes on for many potential buyers,
“That said, some real estate agents are reporting an increase in open home attendance. And while owner-occupiers remain a dominant force in the market, first home buyers are beginning to re-emerge. As sellers adjust their expectations to meet the market, now is a great time to consider upsizing or downsizing.”

New Zealand home prices are now below the average price of NZ$1m, according to CoreLogic. The firm’s NZ head of research Nick Goodall said:

“Consumer sentiment can be a key influence on the market and with the evidence of market downturn clear in every corner of the country, the already-smaller pool of would-be buyers, due to tighter, more expensive credit, are happy to bide their time in the falling market.”

Why are property prices slumping in New Zealand?

Home prices have begun to decline for much the same reason that other major markets are losing their bullishness. Inflation in New Zealand hit 7.3% in June, data from StatsNZ showed, owing to tight global supply chains and knock-on effects in energy markets following Russia’s invasion of Ukraine. 

New Zealand’s central bank is now increasing its base rate in an attempt to reduce liquidity in the system. The country’s cash rate rose from 0.25% in August 2021 to 3% in the same month of 2022. This jump included four consistent 50 basis point rises at the last four meetings. That has been blamed in part for a slowing NZ housing market. 

It’s also feeding into the New Zealand housing market’s complicated relationship with home stock. Data from StatsNZ showed housing production in New Zealand ramped up in the last two years, with monthly builds rising more than 27% between May 2020 and May 2022. Monthly production is four times higher than before the housing crash in 2008/09. 

But, as RNBZ noted in June, housing growth hasn’t kept up with a growing population, with housing stock per 1,000 inhabitants lower in 2020 than in 2011.

“Tight credit conditions and rising interest rates means fewer buyers are competing for an oversupply of stock. This continues to put downward pressure on prices as we head into spring,” QV wrote in its analysis about the New Zealand housing market. 

Economies across the world are now involved in something like a reverse currency war, with each trying to increase interest rates to stabilise inflation and improve the value of their currencies.

For New Zealand though, the central bank’s attempts to raise rates haven’t helped it against the US dollar which is embarking on a similarly aggressive path. The NZD is falling to record lows against the USD amid rising uncertainty, which has been met by investors flooding into the USD as a safe haven asset.

A weakening currency puts further pressure on inflation, raising the possibility of central banks increasing rates, and potentially increasing the risk of a house price crash. 

New Zealand house price crash outlook for 2022 and beyond

New Zealand housing market predictions are forming around a consensus that prices will need to fall to correct the market.

The country was placed alongside Canada and Australia as three of the world’s most overvalued housing markets, according to a Reuters poll. Those surveyed said prices will need to fall 20% to be correctly valued. 

According to CoreLogic, prices could fall 11.8% “from peak to trough” by March 2023, though Goodwin said this shouldn’t constitute a New Zealand house price “crash”:

”If this scenario were to play out, it would ‘only’ take nationwide values back to the same level as at the middle of 2021, limiting the number of recent entrants who could be exposed and in negative equity.
“Through the last major downturn (Oct 2007-Mar 2009) values fell 9.9%, but it did take a total of five years for values to recover back to the previous peak, so expectations of a return to an upward trajectory should be tempered.
“The impact of the weakening market on property values is becoming clearer, and while the reduced market activity is often related to reduced real estate agent commissions, the broader impacts of fewer market transactions are not often considered.”

If analysts’ predictions are to be believed, a New Zealand housing market crash may be unlikely.

Note that analyst predictions can be wrong and should not be used as a substitute for your own research. Always conduct your own due diligence. And never trade money that you cannot afford to lose. 

FAQs

Is the housing market crashing in New Zealand?

No. New Zealand’s average house prices are falling on a monthly basis, but are not currently (29 September) crashing. Median prices are down 5.5% over the year, as of September 2022 data.

Will NZ house prices crash?

Analysts predicted house prices could fall in New Zealand by up to 20%. They noted that this would be close to levels seen during Covid-19. Remember that analysts’ predictions can be wrong and shouldn’t be used as a substitute for your own research.

Why are NZ house prices so high?

NZ house prices are high because supply hasn’t kept up with population growth, matched with rising liquidity during the Covid-19 pandemic, which supercharged the market.

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NZD/USD
0.59277 USD
-0.00292 -0.490%

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