Collapsing mortgage demand hammers New Zealand house prices

The Reserve Bank of New Zealand’s latest mortgage data shows that buyer demand continues to plummet following aggressive interest rate hikes that have pushed key mortgage rates to between 5% and 6.5%:

New Zealand mortgage rates

New Zealand mortgage rates have increased sharply.

The value of mortgage commitments fell 29% in the year to May 2022, according to the RBNZ. This represents a sharp reversal from the 128% annual mortgage growth recorded in May 2021:

New Zealand mortgage commitments

From boom to bust.

The plunge in mortgage commitments is a rational response to soaring mortgage rates, given the debt servicing ratio for new buyers has rocketed to levels not seen since the 2007-08 Global Financial Crisis:

Mortgage debt servicing ratio

Mortgage repayments chewing up more household income.

As shown above, indicative mortgage repayments for a new Kiwi home buyer has nearly doubled, from a low of around 34% of household disposable income in 2021 to around 58% currently.

Accordingly, now has been ranked as the worst time for first-time buyers in 65 years, according to economics consultancy Infometrics:

Infometrics compares the total payments made by homeowners over the lifetime of their mortgage against the value of the property when the loan has been repaid…

There were two key factors that contribute to 2022 being a bad time to buy a house…

The first related to the average proportion of a household’s income needed to service the loan throughout the mortgage.

“People taking on mortgages now are committing to having an average of 33 per cent of their income tied up in mortgage repayments for the next 25 years or longer,” [Infometrics Chief Forecaster Gareth Kiernan said].

This figure is considerably higher than the 21 per cent that prevailed through the 2000s and 2010s…

The second factor related to the expected increase in the value of the property over the life of the loan.

“The scope for house prices to rise rapidly from here, and provide today’s purchasers with significant capital gains, appears heavily limited”, Kiernan said…

“Our analysis shows that even with mortgage rates below 5 per cent, the average home’s million-dollar price means that today’s first-home buyers face much less favourable financial outcomes than a buyer in 1987 did with interest rates of 20 per cent.”

Given the RBNZ has flagged further aggressive rate hikes over the next 12 months, buyer demand will collapse even further. This will place additional downward pressure on house prices, which have already fallen 9.1% nationally since November 2021.

After experiencing one of the world’s biggest house price booms over the pandemic, New Zealand is now facing one of the biggest price busts.

Unconventional Economist
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Comments

  1. The sooner and harder we correct property prices, the fewer New Zealanders will get hurt, both now and in the future.
    No political party has had the courage to back their pre-election ‘promises’ so the market (and the RBNZ if we are lucky) are going to have to do it for them.
    Prices were Overvalued/The Economy in 2007; back when Floating was 10.5% and 2 Year Fixed 9.5% in an attempt to reign in the market, and nothing has changed for the better since then.

  2. RBNZ May lending up 21 percent on April. Up 55 percent on May 2020 ( any comparisons meaningless) First Home Buyers highest monthly level this year by value, investors second highest value this year. Median FHB last released March DTI at 4.8. Given Australia’s significantly higher household debt and weighting towards variable rates, New Zealand will pass the baton on the way down given the recently converted RBA ( rates are not going to rise) is going to pummel Australia as they lap their cousins.

    • Looks like some FHBs caught the falling knife and bought pets.com, er a house in Auckland… but given their cash flows, they’re pretty much doomed. Life’s lessons can be harsh.

  3. Hugh PavletichMEMBER

    Why I’m joining the post-Covid brain drain from New Zealand (incorporating TVNZ video interview with Alice Benge and David Coffeey explain why they are leaving NZ) … Mikaela Wilkes OPINION … Stuff NZ

    https://www.stuff.co.nz/life-style/129114778/why-im-joining-the-postcovid-brain-drain-from-new-zealand

    Worst time to buy a house in 65 years: Infometrics … Susan Edmunds … Stuff NZ

    https://www.stuff.co.nz/business/money/129050795/worst-time-to-buy-a-house-in-65-years-infometrics

    New Zealand’s housing market ‘most vulnerable in OECD’ … Miriam Bell … Stuff NZ

    https://www.stuff.co.nz/life-style/homed/real-estate/129073121/new-zealands-housing-market-most-vulnerable-in-oecd

    Housing Affordability Section – Stuff NZ

    https://www.stuff.co.nz/life-style/homed/housing-affordability

  4. Hugh PavletichMEMBER

    As New Zealand residential rental rates are falling with availability increasing … how many New Zealanders are fleeing to more affordable Queensland and Western Australia ? …

    Available rental properties hit record high, landlords charge less: Trade Me … Melanie Carroll … Stuff New Zealand

    https://www.stuff.co.nz/life-style/homed/renting/129126744/available-rental-properties-hit-record-high-landlords-charge-less-trade-me

    The news is getting better for renters, with more properties listed to rent than ever before and the national median weekly fell for the first time this year, according to Trade Me.

    The Wellington region saw a 45% annual increase in available rental properties to a record high in May, while Auckland and Marlborough also saw record high numbers listed for rent.

    Last month, the national median weekly rent fell by 1 per cent compared with April, to $575.

    “This marks the first month-on-month drop we have seen this year, and is $5 less than the all-time high national median weekly rent last recorded in April,” said Trade Me property sales director Gavin Lloyd. … read more via hyperlink above …

    The post-Covid exodus: Why 50,000 young Kiwis like me are leaving … writes Mikaela Wilkes …

    Why I’m joining the post-Covid brain drain from New Zealand (incorporating outstanding TVNZ interview with emigrants Alice Benge and David Coffey) … Mikaela Wilkes … Stuff New Zealand

    https://www.stuff.co.nz/life-style/129114778/why-im-joining-the-postcovid-brain-drain-from-new-zealand

    Mew Zealanders major concerns … by a country mile … are general inflation and housing inflation … (google search ‘New Zealand crowned worlds riskiest housing market’ … Macrobusiness au) …

    17th Ipsos NZ Issues Monitor – June 2022

    https://www.ipsos.com/en-nz/17th-ipsos-nz-issues-monitor-june-2022

    How many New Zealanders are fleeing to more affordable Queensland and Western Australia ? …

    Tens of thousands of Victorians flee to Queensland … Leith van Onselen … Macrobusiness au

    https://www.macrobusiness.com.au/2022/06/tens-of-thousands-of-victorians-flee-to-queensland/

    The Australian Bureau of Statistics (ABS) yesterday released population data for the December quarter, which showed that Australia’s population growth rose by 63,400 over the quarter:

    Annual population growth nationally rose to 127,900 in the 2021 calendar year with NOM of -3,600: … read more voa hyperlink above …

  5. Hugh PavletichMEMBER

    … A truly shocking read … behind paywall unfortunately …

    Robert MacCulloch: Politicians have sucked the life out of young New Zealanders ,,, NZ Herald

    https://www.nzherald.co.nz/nz/robert-macculloch-politicians-have-sucked-the-life-out-of-young-new-zealanders/JPZD6V7IIJJDM6KSDUUOSWMHK4/

    OPINION:

    Although we “returned” to the university campus this past semester, students are reluctant to physically attend classes.

    They can’t see a future. Their mojo and buzz are gone. Despondency rules.

    One student said she’ll never know what opportunities may have arisen these past years and what doors may have opened had nearly her entire course not been on Zoom. Many say they want to leave after graduating for foreign climes offering higher pay and lower living costs.

    What did the Government do to them? How did it manage to suck the oxygen out of the air they breathe? It took away their dreams.

    The Treasury publication Trends in Wellbeing in Aotearoa New Zealand reports: “Loneliness is highest among people aged 15-24… Teen suicide rates are among the worst in the OECD. Cognitive skills at age 15 are in decline. Levels of school attendance are declining and particularly low among those in more deprived areas. We have the highest rate of bullying in the OECD… People aged under 25 are least likely to report a high sense of belonging… least likely to report life is worthwhile and less likely to vote than young people in other OECD countries”.

    So much for the “well-being budgets”. … read more via hyperlink above (behind paywall) …

    * Robert MacCulloch is the Matthew S. Abel Professor of Macroeconomics at the University of Auckland.

    • drsmithyMEMBER

      What did the Government do to them?

      Picking just one example, NZ youth suicide rates have been horrific for a lot longer than the current Government has been in power, so trying to lay blame at its feet is a fairly transparent case of dishonest partisan hackery.

  6. Hugh PavletichMEMBER

    Wake up landlords, the rental market has changed, property managers say … Miriam Bell … Stuff NZ

    https://www.stuff.co.nz/life-style/homed/renting/129128857/wake-up-landlords-the-rental-market-has-changed-property-managers-say

    RBNZ chief economist Paul Conway says there are reasons to think that some of the core market fundamentals that determine sustainable house prices may also be changing … David Hargreaves … Interest Co NZ

    https://www.interest.co.nz/personal-finance/116553/rbnz-chief-economist-paul-conway-says-there-are-reasons-think-some-core

    ANZ economists say firms are increasingly pessimistic about the outlook for activity and profitability; cost and inflation pressures remain high; profit expectations have sagged to low levels similar to those seen after the GFC … David Hargreaves … Interest Co NZ

    https://www.interest.co.nz/business/116555/anz-economists-say-firms-are-increasingly-pessimistic-about-outlook-activity-and

    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

  7. Hugh PavletichMEMBER

    House prices won’t return to being ‘affordable’, Tony Alexander says … Susan Edmunds … Stuff NZ

    https://www.stuff.co.nz/life-style/homed/real-estate/300626021/house-prices-wont-return-to-being-affordable-tony-alexander-says

    First-home buyers should “throw in a low offer” if they find a house they want to buy, and line up two or three to compete against each other, one economist says.

    Independent economist Tony Alexander says house prices are not sustainable at their current levels and will probably fall until the middle of next year.

    But he says anyone hoping for a fall greater than 20% – which would take prices back to where they were at the end of 2020 – would probably be disappointed.

    House prices lifted 13% between March and December 2020.

    Some commentators suggest that a reasonable measure for housing affordable is for prices to settle at three times household income. But that would require a fall in average price of 66%. … read more via hyperlink above …
    .
    .
    Based on this official work, it seems to have become accepted that a median multiple of 3.0 times or less is a very good marker for housing affordability. Much of the work in support of the 3x standard is based on US research on the US housing market.

    Median Multiples – Interest.co.nz

    https://www.interest.co.nz/property/house-price-income-multiples#:~:text=Based%20on%20this%20official%20work,on%20the%20US%20housing%20market.

    Demographia International Housing Affordability: All Editions

    http://www.demographia.com/db-dhi-index.htm

    Demographia US Housing Affordability – 2022 Edition Released

    https://www.newgeography.com/content/007483-demographia-us-housing-affordability-2022-edition-released

  8. Hugh PavletichMEMBER

    A little history …

    Housing through the decades, what is affordable? … Tony Field … Newshub

    https://www.newshub.co.nz/home/money/2016/08/housing-through-the-decades-what-is-affordable.html

    Why are New Zealand homes so pricey? It has nothing to do with avocados … Charlie Gates … Stuff NZ

    https://www.stuff.co.nz/business/property/106789344/why-are-nz-homes-so-pricey-it-has-nothing-to-do-with-avocados

    Houses just ‘as affordable’ … Rob Stock … Stuff NZ

    https://www.stuff.co.nz/business/10387818/Houses-just-as-affordable

    Housing affordability out of sync with incomes … Hugh Pavletich OPINION … The Age / Sydney Morning Herald

    https://www.smh.com.au/business/housing-affordability-out-of-sync-with-incomes-20110201-1aciy.html

  9. Hugh PavletichMEMBER

    An important speech by Dr Don Brash …

    THE SERIOUS CHALLENGES FACING LOCAL GOVERNMENT – DR DON BRASH

    https://www.bassettbrashandhide.com/post/the-serious-challenges-facing-local-government

    https://www.donbrash.com/

    https://en.wikipedia.org/wiki/Don_Brash

    An address to the Omokoroa Residents & Ratepayers Association AGM
    29 June 2022

    Ladies and gentlemen,

    There are a great many serious challenges facing New Zealand at the present time but most of them – like our falling literacy rates, like the prospect of a very serious increase in government debt over the next few decades as a result of the ageing of our population and the failure of either National-led or Labour-led Governments to do anything about it, like our depressingly slow rate of productivity growth compared with other countries, like our shocking levels of welfare dependency – lie well outside the scope of local government, and should remain outside that scope. These are problems which only central government can effectively deal with.

    But there is one serious problem facing New Zealand that is largely the responsibility of local government, and another problem which, though not of local government’s making, is bearing down on local government and the ratepayers of this and all other districts. I want to talk about both.

    First the serious problem facing New Zealand which is largely the responsibility of local government.

    And I refer to the absolutely outrageous price of housing in New Zealand. … read more via hyperlink above …
    .
    .
    Housing no longer a one-way bet – Reserve Bank … Radio New Zealand / TV1 TVNZ

    https://www.1news.co.nz/2022/06/30/housing-no-longer-a-one-way-bet-reserve-bank/

    The tide may have turned against housing being a one-way bet for a generation of New Zealanders, the Reserve Bank says.

    It comes as house prices remain high despite recent falls, increasing the wealth gap between homeowners and those who do not own a house, the latter often being younger people.

    In a speech at the national property conference on Thursday morning, the central bank’s chief economist, Paul Conway, said those who did not own houses had seen accommodation costs increase, with prospective younger first-home buyers struggling to buy a home. … read more via hyperlink above …

    “For several decades, we have traded houses among ourselves at ever-increasing prices in the belief that we were creating prosperity.” … read more via hyperlink above …

  10. Hugh PavletichMEMBER

    USA … points to consider …

    Why The Housing Bubble Bust Is Baked-In … Charles Hugh Smith of OfTwoMinds … Zerohedge

    https://www.zerohedge.com/personal-finance/why-housing-bubble-bust-baked

    Housing Bubble Woes: Supply Jumps, Sales Drop, Median Price Skewed Higher by Shift in Mix as Bottom Falls Out below $500k, amid Holy-Moly Mortgage Rates … WolfStreet

    https://wolfstreet.com/2022/06/21/housing-bubble-woes-supply-jumps-sales-drop-bottom-falls-out-below-500000-amid-holy-moly-mortgage-rates-median-price-skewed-higher-by-shift-in-mix/

    The Most Splendid Housing Bubbles in America, June Update: “Deceleration” and “Tipping Point” of the Raging Mania … WolfStreet

    https://wolfstreet.com/2022/06/28/the-most-splendid-housing-bubbles-in-america-june-update-deceleration-and-tipping-point-of-the-raging-mania/

    The housing market is weakening fast—but there are no signs yet that a 2008-style crash is coming … Edward J Pinto … AEI

    https://www.aei.org/research-products/one-pager/the-housing-market-is-weakening-fast-but-there-are-no-signs-yet-that-a-2008-style-crash-is-coming/