The downturn in New Zealand’s property market reaccelerated last month, with values falling 1% in February, according to the CoreLogic House Price Index.
This is the largest monthly decline since October last year (-1.3%) and followed relatively minor falls of 0.2% and 0.3% in December and January respectively. Home values are now 8.9% below this time last year.
CoreLogic NZ Chief Property Economist, Kelvin Davidson said the larger drop in home values was unsurprising and continued the weakening trend that has been in place for 12 to 15 months.
“Despite mortgage rates being at or close to a peak, the RBNZ’s grim outlook for inflation and the economy more broadly was always going to weigh further on property values. February’s 50 basis point hike in the official cash rate is also likely to restrain demand,” said Mr Davidson.
Each of the main centres saw values drop in February, apart from Christchurch, where they increased by 0.4%. Wellington, Dunedin, and Auckland were the softest of the main centres, with Hamilton and Tauranga seeing milder declines.
“After the post-COVID housing boom, affordability got so stretched that a downturn had become a very real risk by the second half of 2021, when mortgage rates started to rise again,” said Mr Davidson.
“We subsequently saw house prices start to fall, and even though mortgage rates may now have reached a generalised peak, it’s still expensive to be a new borrower and the extra repayments faced by existing borrowers who are repricing their fixed loans onto higher rates also remain a significant challenge.
“In their latest Monetary Policy Statement, the Reserve Bank noted that it was still too early to accurately estimate the effects of Cyclone Gabrielle on NZ’s economic growth and inflation, and so they pushed ahead with another 0.5% increase to the Official Cash Rate – with the indication that the OCR could still ultimately reach a peak of 5.5%.”
Mr Davidson said a mild recession is also still on the cards, with the unemployment rate set to rise, and house prices likely to drop further.
“However, in terms of any mortgage repayment stress, it’s important to note that their projections do not envisage a material fall in employment. Instead, the unemployment rate is set to rise on the back of a larger labour force, with those new entrants finding it harder to secure a job. This implies a degree of insulation for existing employees/homeowners, but that new borrowing and house purchasing activity could remain fairly subdued.”
CoreLogic House Price Index – Main Centre Average Value
Christchurch’s average property value edged higher in February (0.4%), and is only 1.7% lower than the same time last year. It’s a considerable gap to the ‘next best’, with year-on-year declines of 8.1% in Hamilton and 9.2% in Tauranga.
Elsewhere, after a more stable period for Dunedin in recent months, the market there took another leg down in February, with the average value dropping by 1.5% (to be 10.5% down over the past 12 months).
Wellington remains a key focus. The falls in average values generally continued in February, although Upper Hutt bucked the trend, by recording a 0.9% increase.
Mr Davidson said “I wouldn’t get carried away by Upper Hutt’s reversal in growth trend just yet, but it’s worth noting the wider Wellington area has seen some of the sharpest and earliest drops in prices, which have helped housing affordability to improve significantly. This could ultimately see this area reach a floor in home values sooner, too.”
Auckland’s property market continued to drop in February, with the 1.4% monthly fall taking the annual decline to 11.0%. The falls in February were replicated across each of the sub-markets, although North Shore (-0.5%) was a little more resilient than areas such as Manukau and Franklin, both with 2% declines over the month.
On an annual comparison, Rodney (-6.5%) and Auckland City (-9.5%) have seen the smallest falls, with declines of 13-14% pretty typical elsewhere.
Regional House Price Index results
Outside the main centres, there are some divergent trends in property values that are becoming very clear.
Mr Davidson said in February itself, values fell sharply in some areas – such as Whanganui, Gisborne, Rotorua, and Whangārei – but more mildly elsewhere (e.g. Palmerston North, Napier), and edged higher in Nelson.
“However, regional variability doesn’t come as any major surprise, given the different local factors that apply at any point in the cycle. Indeed, just to emphasise the relative differences, take Queenstown for example – values there have actually risen by 10.2% over the past 12 months, despite the existing high level of prices and wider credit restraints across the market. This highlights yet again cash wealth, as opposed to local incomes, is a key driver in the Queenstown housing market.”
A year of two halves?
Looking ahead, Mr Davidson said the property market still has significant near-term challenges – just as mortgage rates appear to be fading a little as a drag on activity and prices, the next hurdle (i.e. an economic recession) starts to emerge.
“Around 50% of existing mortgages in NZ are currently fixed but due to reprice onto a higher rate in the next year or so – and that change in rates could typically still be in the range of two to three percentage points.
“So far, this repricing process has been handled reasonably successfully, with non-performing loans still low. However, it’s also too early to sound the all-clear.”
Mr Davidson said there is also a case building for property sales activity to start to lift mildly again in the second half of the year and for property values to find a floor. These factors include the peak for mortgage rates, the possibility that any recession proves short-lived, the resurgence in net migration, and also the prospect of some investment demand returning in advance of a possible National election victory and reversal of Labour’s property tax changes.
“Our forecasting model points to a mild rebound in property sales volumes in the second half of 2023, and the Reserve Bank’s projections for the CoreLogic House Price Index point to an effective trough late this year, followed by broadly flat prices in 2024 and only a mild rise in 2025.”