New Zealand has provided Australia’s property experts with a test case this year, following the central bank’s decision to move early with rate rises in an effort to combat rising inflation and a runaway housing market.
As one of the first developed economy nations to lift rates, the Reserve Bank of New Zealand (RBNZ) announced a 25 basis point rise in October 2021, the first increase in the official cash rate (OCR) in seven years.
Well ahead of Australia in its rate tightening cycle, the RBNZ has increased the OCR seven times from an historic low of 0.25% to 3% following its most recent 50 basis increase at the August meeting.
Due to its early lead, New Zealand’s strategy, and its impact on the housing market, has been considered a ‘blueprint’ for many market observers and fellow commentators, CoreLogic NZ Chief Property Economist Kelvin Davidson said.
On a special NZ Property Market Podcast episode, Mr Davidson and co-host Head of Research Nick Goodall invited their Aussie counterparts CoreLogic Research Director Tim Lawless and Head of Research Eliza Owen to discuss the market differences between the two countries.
Up for discussion was the rampant COVID-era property price surges, affordability impacts and regulatory differences.
“NZ has been held up as a canary in the coal mine and people are looking to us as the precedence setter for inflation and monetary policy and what happens in the housing market,” Mr Davidson explained.
Four since May 2022
Seven since October 2021
National median dwelling value 31 July 2022
Australia vs NZ
At a macro level, Mr Lawless said Australian house prices increased 26% through the pandemic with more significant growth of 42% in regional markets from trough through to peak.
“Just like New Zealand we’ve seen extreme growth through the cycle, which has largely been driven by a combination of incentivising monetary policy, low interest rates and fiscal policies as well such as JobKeeper, JobSeeker and HomeBuilder, which amplified the building sector,” he said.
“Across the capital cities Sydney peaked in January and has already fallen -5.2% to the end of July, Melbourne peaked in February with values down -3.4%, with a softer growth cycle due to more disruption from long and more frequent lockdowns.”
New Zealand’s growth story was not dissimilar, Mr Goodall said, with values peaking nationally in November 2021, before a consistent but gradual fall in prices, which were likely to continue softening until affordability improved.
“And when does affordability start to improve? When interest rates stop increasing or start to fall. It sounds like that peak OCR rate is getting a bit closer and we’re getting the same message around the OCR starting to drop next year as well,” he said.
“Nationally our House Price Index grew 41% in less than two years, with the peak of the market in October/November 2021. Now values have come back -11% nationwide and are starting to fall relatively sharply, down -16% in Wellington and almost the same in Auckland.”
Rents as an indicator
One of the really interesting things Ms Owen noted from Australia’s housing perspective was the rental market, which contributes to the goods and services that count towards inflation.
She said tracking rental listings in real time provided an estimate of potential rental income, which had proved to be a leading indicator for actual rents paid and considered as part of the consumer price index.
“We can already see capital city values are up 9.1% over the past 12 months. Capital city rents don’t show much of a slow down so that’s another indicator to us that inflation still has further to go,” she noted.
“When we do start to see an easing in those rental market indicators that might give us a bit of a heads up that some of those domestic inflationary pressures are starting to ease.”
In contrast, New Zealand’s rental market was showing some signs of easing, Mr Goodall said, following the removal of COVID restrictions, allowing Kiwis to leave the country and chase work and pay opportunities overseas, particularly in Australia.
“The draw of New Zealanders going to Australia for greater wages is creating negative migration figures and less pressure on rental demand,” he said.
Sydney vs Auckland
Using Sydney and Auckland as comparable cities, the two research teams noted there were many similarities including typical house values (approximately AUD$1.35 million) and the dwelling value to income ratio of 10 times. Barriers to entry and affordability for both global cities presents a major challenge, Mr Davidson said.
The portion of income required to service a new mortgage in Sydney hit a high of 51.3% in Q1 2022, while saving for a 20% deposit takes on average 14.1 years, and higher again for a house.
“Mortgages are absorbing a high proportion of income in Auckland, it still requires 55% for someone on an average income to buy the average property, using a 20% deposit,” he said.
“New home owners are using quite a bit of income and it takes 14 years on average to save a deposit, which has seen the average age of first home buyers sneak up over time.”
Tasman housing outlook
Australian home owners are bracing for further rate hikes, particularly after the latest minutes from the August RBA board meeting confirm the central bank will be ‘normalising monetary conditions over the months ahead’.
Still, Mr Lawless said it was worth noting the trajectory of policy is subject to considerable uncertainty, however the consensus remains for another 50 basis point rate hike in September.
This would take the cash rate to 2.35%, still well below the neutral setting and likely to have a downward impact on values.
Meanwhile New Zealand’s cash rate of 3% is at its highest level since September 2015 with the RBNZ still keenly focused on inflation and doing what it takes to quell price pressures.
Mr Davidson said despite the rapid rise and sharp fall of house prices, rate hikes and inflation there had been some interesting developments in August and a change in sentiment.
“Everything in this environment is condensed,” he said.
“There is a sense here that we’re getting to the end point quite quickly. We’ve seen mortgage rates cut in the past couple of weeks, and quite sharply too, and across one-year and two-year terms. It seems like we’ve seen the upswing fast and downswing fast and now looking to the end arriving quite fast.”
“We’re not sounding the all clear by any means, house prices are still high and there’s stretched affordability but there’s a sense maybe that people might be looking ahead at this being a buying opportunity.”