Higher interest rates, lower sales volumes, and flatter house prices are forecast for the rest of the year after a weak start to 2022 for New Zealand's previously overheated property market.
CoreLogic NZ's latest Property Market & Economic Update confirms that sales activity began to show hints of a slowdown in the middle of 2021, which then became ‘genuinely weak' as the trend extended into the first quarter of the year.
The total value of residential real estate reached $1.73 trillion at the end of Q1 2022, up from $1.72 trillion at the end of 2021, with mortgages secured against 19% of that value, and the other 81% household equity.
CoreLogic Chief Property Economist Kelvin 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 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% 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.”
Property sales volumes in Q1 2022 are the weakest they've been in about a decade, Mr Davidson says. While the Omicron variant may have stalled property turnover temporarily, the key drivers for the sales slowdown were fundamental and longer-lasting.
"Higher mortgage rates and reduced credit availability is having a significant impact on sales,” Mr Davidson says.
"We expect property market activity will continue to be subdued, with sales volumes perhaps declining by as much as 10% this year, and another 5% or so in 2023. This is best characterised as a slowdown though, rather than a serious downturn.”
Property value growth rates have definitely slowed, with the national average only up by 0.7% in March, the softest figure since values dropped by 0.2% in August 2020. The quarterly increase of 3.6% was the smallest quarterly rise since 1.9% in the three months to October 2020, while the annual growth rate has also slowed to 23.4%.
"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.”
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 $5.7bn down by $1.9bn from the same month a year earlier.
Mr Davidson said the slowdown in lending to investors has been the key driver of overall trends, but owner-occupiers have also cooled more recently too, especially with the reduction in the low deposit lending speed limit on November 1 from 20% of activity to 10%.
The first quarter of 2022 has revealed clear shifts in the composition of buyers in the property market, most notably among first home buyers (FHBs), who only had a 23% share of purchases across Q1 as a whole, and 21% in March.
Apart from April 2020, impacted by lockdown, this is the lowest monthly share for FHBs since the second half of 2017. Mr Davidson says the abrupt shift began in January, reflecting November's tightening of the loan-to-value ratio (LVR) rules and December's CCCFA law changes.
The common drivers of the widespread post-COVID upswing in property values, including low mortgage rates and tight supply, are no longer in play just as the total number of listings available rises due to a slowdown in sales activity.
Mr Davidson said the next phase of the cycle is expected to result in a sharp and widespread slowdown in property value growth.
"However, 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.”READ THE FULL REPORT
The quarterly Property Market and Economic Update for New Zealand delivers timely, detailed insights into the fundamentals that are affecting the residential property market. The report looks at property value growth, sales volume, time on market and rental growth, together with detailed charts and insights into housing market affordability.Download report