ANZ warns of deeper New Zealand housing market collapse

By in New Zealand Economy

| 28 comments

ANZ Bank’s latest property focus has raised the risk of a deeper New Zealand housing market crash, with both prices and construction at risk of heavy falls:

The housing market is continuing to cool, with May prices down 5.5% from their November 2021 peak (ANZ seasonal adjustment)… That’s six months in a row of moderate house price falls – not a crash by any means, but a reflection of the current (cooler) fundamentals of the market…

New Zealand house prices

The available stock of real estate listings is now up 84% on last May’s (very low) lows. And that’s not coming from a surge in new listings. Rather, as sales volumes fall away and auction clearance rates plummet, houses are simply remaining on the market for much longer than we saw during the red-hot 2021 boom…

And while we continue to forecast what we’d call a soft landing for house prices (falling ‘only’ 11% over 2022), risks of a larger fall are there. In particular, sharp increases in global interest rate expectations have flowed through into still-higher mortgage rates in New Zealand – and while getting on top of CPI inflation with higher policy rates is the optimal thing to do from a sustainable economy perspective, house prices are likely to face larger near term declines if upside interest rate risks continue to materialise…

Mortgage rates have risen sharply over the past month. This has taken the average 1-year special rate offered by the major banks up to 5.35%, and the average 5-year rate up to just below 7%. Mortgage rates around these levels were commonplace in the decade before COVID, and aren’t particularly high in a historic comparison, but the pace of increases is unprecedented. The term structure of the mortgage curve remains steeply upward-sloping, making fixing for longer expensive. That’s not new, but we are now at a point where breakevens are so high that one has to expect significant further rises in interest in order for fixing for 2 years or more to be worthwhile. That could happen, but financial markets are already factoring in big increases, and the hurdle for a nasty surprise is now pretty high…

New Zealand mortgage rates

It’s also worth noting that according to RBNZ data, almost 60% of outstanding mortgage borrowing is fixed for less than a year. Households who may have taken advantage of the record-low interest rates over 2021 will find it challenging to maintain the same level of discretionary spend when facing mortgage rates that could be more than double their previous fix. As noted above, we think they’ll manage, and that should provide a floor under how far house prices will fall. But it will be at the expense of household consumption spending (ie GDP growth). That’s a feature, not a bug, of tightening monetary policy…

Bringing it all together, the housing market is cooling convincingly. And risks are building that we could see a more substantial decline than expected…

Residential investment is in the firing line as interest rates push higher to combat decades-high inflation, house prices fall, and shortages of both materials and labour continue to add uncertainty in the near term while limiting upside growth potential. In short, the calculus of building has shifted dramatically in the space of a few quarters and the stars are now aligned for an unwind. In fact, some indicators are already pointing sharply south…

New Zealand residential construction

Bringing it all together, we think residential construction activity is close to topping out (if it hasn’t already)… Overall, we have pencilled in around a 6% contraction in residential investment activity over 2023, which relative to previous cycles can very much be thought of as a soft landing…

So does negative growth in residential investment signal a looming recession? In short, it’s not a lock, but it certainly raises the risk. History tells us that residential construction activity can contract without pushing headline GDP into negative territory. At the end of the day, whether or not New Zealand enters a recession is very likely to depend on how households hold up through this…

At the end of the day, New Zealand isn’t just one big housing market, but it’s sure felt like it the last couple of years…

Unconventional Economist
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Comments

    • tetama

      wrong place below

      funny enough i remember peach y saying that a few years ago, which led me to believe that person was a high profile accountant. so tezza i thought you may be terry mccrann or david collyer and now wonder if you peach y (who i think is high profile accountant but perhaps not) or reus a or chris j oye. who are you. was elliott the one who had dealings with the whole aitken / bell potter affair re new cfo

      • Mr Tezza

        LOL. None of the above. Simply an ANZ fan.
        They were stealing from me when I had a home load with them.

        • tetama

          ok. but it seems you know ANZ ppl well. as a home loan customer cannot understand why you would “meet” CFO who became CEO.how many homeloan customers meet the CEO and cfo unless in another capacity ie friends, acquaintances, business. re Elliott as a nice person not sure everyone would agree. refer perhaps Aitken

      • The Travelling PhantomMEMBER

        I think Mr Tezza is left leaning, peachy centralist if not right winger

          • The Travelling PhantomMEMBER

            Indeed, but if she’s really an accountant that would break the accountants stereotype by a lot

          • JohnRMEMBER

            @Phanny Stereotypes? You can tell an extrovert accountant because when you’re chatting to them they look at your shoes instead of theirs. (edit: except SPAs of course who are a blast).

  2. tetama

    funny enough i remember peach y saying that a few years ago, which led me to believe that person was a high profile accountant. so tezza i thought you may be terry mccrann or david collyer and now wonder if you peach y (who i think is high profile accountant but perhaps not) or reus a or chris j oye. who are you. was elliott the one who had dealings with the whole aitken / bell potter affair re new cfo

  3. Hugh PavletichMEMBER

    ANZ’s economists warn that the stars are aligned for a slowdown in residential construction … Greg Ninness … Interest Co NZ

    https://www.interest.co.nz/property/116527/anzs-economists-warn-stars-are-aligned-slowdown-residential-construction

    Both house prices and GDP set to suffer as interest rates climb … Harry Smith … Stuff NZ

    https://www.stuff.co.nz/business/opinion-analysis/129091720/both-house-prices-and-gdp-set-to-suffer-as-interest-rates-climb

    Shockwaves as new-build market slows and fears rise for housing market new builds … Carmen Hall … NZ Herald

    https://www.nzherald.co.nz/bay-of-plenty-times/news/shockwaves-as-new-build-market-slows-and-fears-rise-for-housing-market-new-builds/YAYKC5EEDR7EG5CBRRRON5WBGA/

  5. p

    Defying the negativity, RBNZ May data released today show First Home buyers remaining resilient, taking 18.2 percent of new lending by volume, consistent with levels seen in 2020/21. 66 percent by $volume had LVRs below 80 percent , by number 70 percent of all FHB had LVRs below 80 percent. The average FHB mortgage rose year on year to $595000, notwithstanding the highest originating mortgages across most terms in 7 years.
    For those looking for additional data RBNZ also release a monthly series with average gross incomes across various DTI metrics- insightful for balance https://www.rbnz.govt.nz/statistics/series/lending-and-monetary/residential-mortgage-borrower-gross-income-bgi

    • rustyMEMBER

      I think you have to be careful of the language – for instance, lets assume that house prices in Auckland fall 20%, you would still be up on what they were 12 months ago – losing 11 months of gains only! And truth be told, they have only fallen a modicum of that.

  6. PeterMEMBER

    “So does negative growth in residential investment signal a looming recession? In short, it’s not a lock, but it certainly raises the risk”

    Nice to see the ANZ economists have a sense of humour…

    And in reply to P, in July and August we will see FHB share collapse back as ANZ have paused high LVR lending. Im guessing the pull back in prices encouraged some FHBs to grab the falling knife. Poor souls.

  7. Janet

    Sharon Zollner (ANZ economics public face) has been brave enough to give us a hint at what’s happening.
    She knows what’s about to happen, better than most Kiwis, and has been understandably guarded in her comments, but she knows….and you can almost hear her screaming at the populace, to duck and take cover.
    ANZ (and now ASB) haven’t cut their deposit ratios to better than 20% for no reason.

  8. Jumping jack flash

    “New Zealand isn’t just one big housing market, but it’s sure felt like it the last couple of years.”

    Maybe not just a housing market but it and most other economies are certainly fuelled by debt expansion and debt spending.

    Houses were an efficient way to fill an economy with debt. They also possess many desirable properties such as the one where their capacity for holding debt increases as debt is poured into them.

    • dodgy as

      I think most economists miss the fact that the debt is now essential. We fail with it or we fail without it, same outcome different time scale.
      Many companies that get into difficulty fall into the trap of believing that they can escape the debt trap if only….
      The logic is solid (in their mind), they therefore sign up for more debt almost regardless of the loan T&C’s. It’s always the beginning of the end when new debt comes with onerous conditions that were not attached to the old debt (often simply being rolled over). When you see this happen you know for sure that the vultures are circling.

      Not taking on new debt has exactly the same as not selling any product, however not rolling over debt results in a contraction, how much and how fast depends on the nature of your economy with Export Diversity being the key to how fast an economy can adapt.

      I’m not going to bang on about Complexity Analysis today but there’s a whole emerging field of Opportunity Analysis that can be used to find the limits of how fast an economy can react. On this basis NZ looks marginally better than Australia but without new debt both economies look like very sick puppies.

  10. Hugh PavletichMEMBER

    Dileepa Fonseka OPINION: The ‘no win’ housing slump … Stuff NZ

    https://www.stuff.co.nz/business/129097516/dileepa-fonseka-the-no-win-housing-slump

    … extract …

    … Leith van Onselen, an economist who writes about New Zealand’s housing market on Australian economics website Macrobusiness, argues the opposite:

    “New Zealand is facing a miserable period ahead,” he says. “New Zealand’s housing market was the most over-valued in the English-speaking world and now faces a serious price crash on the back of Reserve Bank tightening.” … read more via hyperlink above …

    ‘A staggering sum:’ $1b spent on emergency housing … Jason Walls … Newstalk ZB

    https://www.newstalkzb.co.nz/news/politics/a-staggering-sum-more-than-1-billion-spent-on-emergency-housing-grants/

    Latest Reserve Bank figures show that while first home buyers are hanging tough, May saw the lowest total number of mortgages approved for a May – barring the pandemic affected May 2020 month … David Hargreaves … Interest Co NZ

    https://www.interest.co.nz/personal-finance/116533/latest-reserve-bank-figures-show-while-first-home-buyers-are-hanging-tough

  11. Hugh PavletichMEMBER

    Banks may be deciding low equity loans to first home buyers are just not worth the risk …

    First home buyers with less than a 20% deposit are paying more for a home than buyers with a full deposit, pushing up their mortgage risk profile for banks … Greg Ninness … Interest Co NZ

    https://www.interest.co.nz/property/116544/first-home-buyers-less-20-deposit-are-paying-more-home-buyers-full-deposit-pushing

    House prices may be declining and mortgage interest rates may be rising, but the amount first home buyers are paying to get their own home remains at or near record highs.

    According to the Real Estate Institute of NZ, the national lower quartile selling price peaked at $670,000 in November last year and since then has declined by $42,000, dropping back to $628,000 in May.

    Over the same period, interest.co.nz estimates, based on Reserve Bank lending figures, that the average amount paid for homes by first home buyers has increased by $11,000, rising from $705,000 in November last year to $716,000 in May.

    However the figures suggest that the recent increase in the amount being paid by first home buyers has been entirely driven by those first home buyers purchasing a home with a low deposit of less than 20%, and consequently a high loan-to-value ratio (LVR) loan.

    Between November last year and May this year the estimated average amount paid by first home buyers with a minimum 20% deposit decreased from $702,000 to $697,000, while the estimated average amount paid by first home buyers with less than a 20% deposit increased from $709,000 to $761,000. … read more via hyperlink above …