New Zealand’s housing market is flashing red

After experiencing one of the world’s biggest house price booms in 2021, the warning signs are piling up for New Zealand’s housing market.

First, after registering annual mortgage growth of 128% in May last year, the value of new mortgage commitments contracted by 23% in the year to February:

New Zealand mortgage commitments

After the epic mortgage boom comes the bust.

Given almost every Kiwi purchases a home with a mortgage, this slump in demand is a negative signal for New Zealand house prices.

A key reason for the slump in mortgage demand is because mortgage rates are rising. As shown in the next chart from Interest.co.nz, floating mortgage rates have lifted by around 0.7% from last year’s low, whereas 3-year fixed rates have climbed 2.1% from their 2021 low:

Similar rises have been experienced across the other fixed rate terms.

The majority of New Zealand borrowers are on fixed rate mortgages. Accordingly, they already face a painful increase in mortgage repayments once their fixed terms expire.

To add further insult to injury, economists have projected that the Reserve Bank of New Zealand (RBNZ) will lift the official cash rate (OCR) from its current level of 1.0% to 2.5% by November this year, with Westpac and the financial markets also tipping the OCR to rise a further 1% by the end of 2023.

Therefore, New Zealand mortgage rates are certain to ratchet higher, which will further dent household finances, mortgage demand and house prices.

The prospect of soaring mortgage rates should be especially disconcerting for the one-third of mortgage borrowers in 2021 that originated their loans at a debt-to-income ratio above six times:

New Zealand mortgage debt-to-income ratios

Recent Kiwi mortgage borrowers are very highly leveraged

These recent borrowers will be especially sensitive to rate rises.

Next, Kiwi home buyer sentiment has collapsed with ASB’s “good time to buy a house” index plunging to a 26-year (record) low:

New Zealand home buyer sentiment index

Kiwi buyers are very pessimistic on property.

ASB’s commentary is about as bearish as it can get:

When asked whether it is currently a good time to buy a house, our survey respondents have never been more definitive. A net 28% think it is a bad time to buy (7% think it’s a good time, 35% a bad time), the most negative reading for buyer sentiment since our records began 26 years ago.

And who could blame them? The housing boom has lifted prices to extremely stretched levels, mortgage rates are rising, and the weight of expert opinion is now warning of outright falls for this year.

Next, New Zealand auction clearance rates have tanked, which is typically a bearish indicator for property prices (chart from ANZ):

New Zealand auction clearance rates

Crashing auction clearance rates signal falling New Zealand house prices.

Next, Kiwibank tips that New Zealand immigration will go further negative over the coming year, which will further depress housing demand (other things equal):

New Zealand net migration

Annual immigration to fall deeper into the red.

Finally, New Zealand’s Parliament this week passed legislation removing the ability of property investors to claim mortgage interest as a tax deductible expense on existing residential properties. Accordingly, interest will no longer be deductible for residential property acquired on or after 27 March 2021, with earlier investors’ ability to deduct interest to be phased out by 31 March 2025.

Logically, this rule change should dampen future investor demand as well as prompt a significant number of pre-existing investors sell their properties – either of which would put downward pressure on house prices.

The incentives for investors to sell will also increase in line with interest rate rises, since investors will be less able to share the rising mortgage costs with the taxman.

When weighed up together, the various indicators are pointing to a sizeable New Zealand house price correction, which could turn into a crash if the RBNZ hikes rates too far.

Unconventional Economist
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Comments

  1. Non- deductibility of interest rates is a killer blow. Let’s hope Albo sees the light when he comes in.

    • Predicting big sales activity and potential heavy losses in 2023/2024 before the phase out happens in 2025. Basically need to get positive geared property. Means rents go up or prices go down…or both.

      • kiwikarynMEMBER

        Cannot get positive geared investments on existing property now unless you are buying with mostly cash. The Govt thought that’s ok, investors can build new properties instead. But new properties have never been positively geared even with interest deductibility (again, unless paying mostly cash) due to extraordinarily high building costs in NZ. Also the type of property being built (tiny townhouses crammed in 6-8 per section with no parking) offer little in the way of capital appreciation, no ability for the investor to add value down the track, and almost certain depreciation as soon as public housing tenants are installed in one of the units. So we have the situation where investors are not buying old or new properties, and are selling existing properties, which all spells really bad news for tenants as rents sky rocket and people can’t even find a house to rent even if they could afford to pay for it.

        • ApotheoticMalaise

          Why is it bad news for renters if an investor choses to sell their property? Either they:
          1) sell to another investor, who rents it out, or
          2) sell it to an owner occupier or first home buyer, who may otherwise be renting.

          Unless that house is sold to someone who deliberately keeps it empty, investors selling have no negative impact on renters.

  2. Hugh PavletichMEMBER

    Stats NZ reports that the new dwelling consent rate per 1000 population pa (standard industry measure) is 9.7 (now near 50k units on an annual basis) … refer excel file Tables 8 & 9 …

    https://www.stats.govt.nz/information-releases/building-consents-issued-february-2022

    It appears Australia’s rate is about 8.52 per 1000 pop pa … therefore NZ seems to be about 14% higher … which is most unusual.

    If Australia with its population of about 25.8 mil had NZ’s approval / consent rate of 9.7 units per 1000 pop pa, it would be approving 250k on an annual basis !

    Note too … NZs apartment builds are negligible.

      • Hugh PavletichMEMBER

        The Travelling Phantom …

        We will all learn the answer to that I suspect in the very near future … as we get through the idiotic covid ‘tsunami of easy money’ highly inflationary fiscal and monetary stimulus.

        Then back to sobering reality … where the only true measure of scarcity / abundance is price.

    • kiwikarynMEMBER

      Consents are meaningless if they never get built. Still waiting for something to happen on the section down the road that was bought for $1M and was supposed to have 7 townhouses built on it by now (all sold off the plan over a year ago). Several other development sites around the area are similarly dead – probably has something to do with the fact that the market is already awash with unsold townhouses built by spec developers who cannot find a buyer for them.

      • ApotheoticMalaise

        In Australia about 85% of consents (i.e. building approvals) are eventually completed. Of that 15% that dont get built, some fall through the cracks and lapse, but most are replacing demolitions of existing buildings so dont add to the net stock.

  3. Camden HavenMEMBER

    What is the NZ economy components? Dairy tourism houses wine lamb. Ratios gunna explode

  4. If it fell 20%, it only takes prices back to where they were several years ago! And it won’t fall anywhere near the much.

  5. Hugh PavletichMEMBER

    Claire Dale details a coming storm for New Zealand’s future retirees: Still renting and not enough savings to avoid poverty …Claire Dale … The Conversation / Interest Co NZ
    … h/t PH …

    https://www.interest.co.nz/personal-finance/115138/claire-dale-details-coming-storm-new-zealand%E2%80%99s-future-retirees-still

    ‘Better off in a refugee camp’ – Family flees war only to end up in a motel … Chloe Blommerde … Stuff NZ

    https://www.stuff.co.nz/life-style/homed/housing-affordability/128185645/better-off-in-a-refugee-camp—family-flees-war-only-to-end-up-in-a-motel

    Why you should pay attention to New Zealand’s rental crisis, even if you aren’t renting … Dileepa Fonseka … Stuff NZ

    https://www.stuff.co.nz/business/128194617/why-you-should-pay-attention-to-new-zealands-rental-crisis-even-if-you-arent-renting

    Housing greed threatens New Zealand’s future … OPINION Daniel Dunkley … Stuff NZ

    https://www.stuff.co.nz/business/opinion-analysis/300554289/housing-greed-threatens-new-zealands-future

  6. Even a year ago, the MSM would ignore any comments or articles that might even have a hint of trouble brewing in the property market.
    About 6 month ago, that all changed.
    It’s on the front pages of most papers and websites, and a free exchange of opinions is encouraged in a way that only ‘positive’ ones were in the past.
    New Zealanders have been made very well aware of what’s in front of them.
    It’s only a matter of whether they take notice and appropriate action or whether they hide their heads under a blanket of “It can’t happen here, because…..”
    But the biggest indicator, by far, of how much courage the regulators and Government have to fix this mess comes in the last line of your article, “… if the RBNZ hikes rates too far.” If ever there is a time for going too far it, it’s now.

  7. Hold on, mortgage commitments were up 128% last year and have now dropped 23%, which still leaves mortgage commitments a massive 75% above 2020. Seems like there is still plenty of downside from here.

  8. Hugh PavletichMEMBER

    The Toughest Fix in Urban America: Transforming Civic Culture … Neil Kleiman and Alexander Shermansong … Bloomberg

    https://www.bloomberg.com/news/articles/2022-03-31/to-fix-urban-policy-mayors-must-fix-culture-first?srnd=premium-asia

    … extract …

    … These days, frustration with city services and the organizational ethos behind them is boiling over. From mask mandates to race relations to inflation, people want a civic sector that is more in tune with their personal needs and more up to date with the current events shaping their lives.

    Business leaders have long recognized the power of culture for corporate success. Indeed, there are shelves full of books and magazines — not to mention large consulting firms — all fully dedicated to reengineering corporate operating principles.

    Mayors around the country crave such knowledge. They tell us again and again how much their culture stymies innovation. Some things have changed for the better for sure, but many civic chiefs and entrepreneurs feel blocked — and increasingly they blame the culture.

    For these leaders, there has historically been almost nothing: No practical advice or university studies on how to transform organizational culture, whether within fire departments, health agencies, or city hall itself. … read more via hyperlink above …

    … Authors information …

    Neil Kleiman and Alexander Shermansong are professors at New York University and the authors of “City Leader Guide on Organizational Culture Change: Creating Conditions for Innovation, Collaboration, and High Performance in City Hall.”

  9. kiwikarynMEMBER

    FHB and Investor market is dead. Watched one of Wed’s auctions – all of the properties below $800k didnt attract a single bid. Properties $1M plus sold with competitive bidding which took them over their estimated price range.