Reserve Bank sounds death knell for New Zealand’s housing market

The Reserve Bank of New Zealand’s (RBNZ) aggressive monetary tightening has seen the official cash rate (OCR) soar from its record low 0.25% in August 2021 to 2.0% currently.

New Zealand’s housing market is already feeling the pinch, with median dwelling values nationally falling 9.2% from the November 2021 peak and the stock of unsold homes swelling.

Last month’s RBNZ ‘forward track’ guidance suggested that the OCR would hit 3.4% by December before peaking at 3.9% in June 2023. Thus, based on this guidance, the RBNZ’s monetary tightening is only about half way done.

ANZ Bank has released new forecasts suggesting the RBNZ will opt for double interest rate hikes at the next two meetings, lifting the OCR to 3.0% by the end of August. However, the ANZ then expects the RBNZ to wind back, with the OCR to peak at 3.5% by November:

We have tweaked our OCR call and now expect the RBNZ will lift the OCR by 50bps in both July and August (previously we were picking 25bps for August). We continue to expect that signs of softening domestic demand will see the RBNZ return to 25bp moves, just a little later than previously anticipated.

We’re forecasting further 25bp hikes in October and November will bring the OCR to a peak of 3.5%. From there, we think the RBNZ will hold off on further hikes as inflation pressures wane…

The RBNZ is placing a lot of weight on the strength of the labour market in their assessment that the economy can withstand a rapid rise to 4% for the OCR. That means the bar for returning to 25bp hikes will be very high until we start to see a meaningful easing in labour demand. And so far, that’s yet to emerge…

New Zealand jobs

Timely inflation data have also offered no respite – particularly food and petrol. While there’s not a lot the RBNZ can do about either, the fact is, petrol and food prices are both highly visible, and are driving inflation expectations higher, particularly for consumers…

[But] there are early signs that all is not well. Consumers are miserable, and it’s not just Omicron. We’ve seen a synchronised plunge in consumer confidence globally as high inflation and rising interest rates curtail households’ real disposable incomes (figure 2)…

Consumer confidence

On that front, we see private consumption softening significantly towards the end of next year and into 2023 as higher interest rates, high inflation, falling house prices, and weak confidence bite…

Risks around our outlook are very one sided. It really wouldn’t take much for the domestic economy to enter recession in late 2022 to mid-2023.

Thus, according to ANZ’s forecast, the OCR will rise quicker than the RBNZ’s guidance, but will also peak at a lower level. In turn, the headwinds for the housing market will be stronger in 2022, but won’t be as strong in 2023.

Regardless, the ANZ’s OCR forecast would still see mortgage rates rise to around 6% – roughly double the pandemic low. The impact on house prices would be serious, with values nationally staring down 20%-plus peak-to-trough falls.

We are almost half way there already.

Unconventional Economist


  1. The NZ property market is being attacked from all regulatory sides. Well beyond time…

    Inland Revenue applies to put large, high-profile property investment firm Propellor Property into liquidation…founded in 2009, by high profile Nikki Connors , Connors said that by the age of 27 she was earning more than the prime minister of New Zealand. Connors, refers to herself as the Queen of New Zealand property.

    • There was a similar couple or woman in a mining town in Australia that went from rages to riches and back to rags as mining towns lost huge values off property. ANZ just raised it’s 3 year fixed term rate to 6.99%

  2. Hugh PavletichMEMBER

    General inflation and housing inflation are by far and away the major concerns of New Zealanders … as the recently released Ipsos Survey makes clear …

    17th Ipsos NZ Issues Monitor – June 2022

    Why National is winning … Toby Manhire … The Spinoff

    Put simply … the authorities will have to sort these critically important ‘bread and butter’ issues … or the public will get rid of them in a little over a year at the nest general election.
    Essential viewing … it appears the gib board / plaster board fiasco is going to lead to internationally competitive building supplies …

    Shareholders’ groups call for Fletcher chair to quit amid GIB crisis …VIDEO … 1News TVNZ

    … check recent MB posts …

  3. Toronto’s housing market is down 9% in three months! Canada roughly comparable to Australia in banking practices/instiutional structures etc and Toronto is somewhat like Sydney in its housing market excesses. Their cash rate moved earlier and they currently at about double where the RBA is.

    At these rates they will be close to 20% drop in a bit over 6 months and we still have a way to go on rates moving up.
    NZ and Canada is where we will be in a few months. I think the ‘spring selling season’ will be a bloodbath.

  4. Hugh PavletichMEMBER

    Breaking News !!!

    The largest mortgage lender pushes through new chunky increases, raising rates to new recent highs. At the same time ANZ raises term deposit rates substantially … David Chaston … Interest Co NZ

    Seven percent mortgage rates are imminent.

    ANZ, New Zealand’s largest home loan lender, has raised its five year fixed rate by +50 basis points to 6.95% in sweeping changes across their rate card.

    All ANZ’s new fixed rates are now market highs.

    The bank has no carded offers below 5% anymore.

    Its new one year fixed rate ‘special’ is 5.35%, also a +50 bps jump.

    The new two year fixed rate ‘special’ is 5.80% and a +45 bps hike.

    The new three year fixed rate ‘special’ is 5.99% and a +34 bps rise. … read more via hyperlink above …

  5. – The RBNZ – like the FED, RBA, ECB, BoE, …………… ) FOLLOW the rates as set by a force called “Mr. Market”. All other speculation about e.g. “fighting inflation” is completely NONSENSE !!!!!!!!!!!!!

  6. Did a detailed report for my clients on Friday looking at the income statement and mortgage serviceability of first home buyers in Auckland. At 4.85% they can (just) manage an IO loan, but a P&I loan entails a deficit of about 5k a year. Not insurmountable, but hard to manage without outside capital injection and leaves them precarious. But at 7% it’s game over…. the deficit, even on IO, looks to me unmanageable.

    We are currently crossing the Rubicon…

    And as house prices fall, new high LVR lending solvency is being rapidly eroded with another 7% slide taking the November 2021 vintage into insolvency. If prices tumble 20%, which they could easily do, then nearly all loans back to end 2020 become insolvent. That suggests to me we are almost definitely going to see a rise in delinquencies, an NPL cycle – even if its modest – and pressure bank earnings. I dont foresee a major NPL issue but if you look at house price falls in Spain, Ireland, and many cities in the US, one can’t be ruled out. Either way, consumption is gonna get torched.

    • Peter, with respect New Zealand is not Ireland part ll almost all mortgage lending to FHB in New Zealand is P & I , 36 percent of mortgage lending to FHB Ireland in 2006 was interest only, 36 percent were 100 percent, 41 percent above 96 percent. Since January 2020 fewer than 12500 FHB have taken loans above 80 percent LTV. Housing turnover remains very low in New Zealand, home ownership rates remain low , that is there has been no speculation in housing thru the pandemic, interest only lending has been declining for many years .in aggregate it is back to levels last seen in 2015, notwithstanding the increase in mortgage stock. There remains a significant shortfall of housing in New Zealand., and particularly if compared to the likes of Spain/ Ireland.
      As turnover in sales continues to fall, in the coming quarters the usual suspects will start to make noises before and undoubtedly the banks will start competing with one another as credit growth declines sharply .

      • The argument about a shortfall in housing made a good deal of sense in 2019/20, but since then, we’ve seen 75,293 housing completions as of March 2022. Assuming occupancy of 2.5x that covers a population of around 188k, but the NZ population has increased by only 86.7k over the same period, so the shortage of housing has materially decreased, housing around 100k extra people, and continues to do so. Also, something we don’t know, but something that is evident in all housing markets – and is especially likely when interest rates have been low – we don’t know how many homes are being held off market and un-occupied. The 2018 Census suggests it’s 191.8k, so there’s potential supply that may come onstream in a downturn as land bankers look to sell. So that argument about a shortage was correct, but isn’t really so today.

        Banks have been more prudent about lowering high LVR lending, but that’s only been because of RBNZ regulations, and it was reported at the end of April that friends and family have provided NZD 22.6bn in loans to housing, mostly to FHB’s, who almost certainly did not record it as a loan when they applied for their mortgage. Those loans will become intergenerational transfers, but it suggests the safety net of LVR constraint may not be as strong as official numbers suggest.

        In 2021, 37% of FHB’s had LVR>80% and since Jan-21 this lending translated to NZD 12.37bn, not an insignificant amount and nearly all of it vulnerable to insolvency (even if we exclude the Bank of Mum and Dad topping these FHB’s up). As for IO lending, 25.5% of all new loans were IO, barely changed from 2020 and 2019. In 2021, that equated to NZD 25.3bn in IO loans. In 2021, 15.6% of FHB’s had a DTI>6 and LVR>80%. The quantum of this is small, but the vulnerability high. Also, some 83% of new borrowers were borrowing with a 30-year term, and as interest rates rise, the deviation between an IO and P&I mortgage converges, so very few new borrowers can be termed-out, and moving from P&I to IO will only cushion the blow as interest rates rise.

        As for your comment about “there has been no speculation in housing thru the pandemic” all I can say is I honestly don’t know how to respond to that comment except to say its utter nonsense.

        1. The housing market is in trouble, that is patently obvious,
        2. There is a major serviceability issue that is getting much worse as rates rise,
        3. Falling house prices will lead to the emergence of insolvencies, but that doesn’t necessarily translate into NPLs, but we are likely to see some sort of delinquency cycle emerge which will need provisioning against. Its not a disaster for the banking system, but it will clip the banks wings,
        4. As the housing market is full recourse, people will do what they can to make payment, but because of the length of morrtgage duration, restructuring will be difficult and it will be a slow drawn out affair.
        5. Household consumption expenditure will be torched.

        • Do you honestly think that there won’t be a NPL issue given serviceability and the broader economic implications of torching household spending?

          • I definitely think there will be a delinquency/NPL cycle.

            There are some factors which mitigate against it being a large NPL cycle. The run-up in prices means the vast majority of home owners have deep equity and we’d need to see a truly massive price correction to change that. Macro-prudential regulations have restricted high LVR lending. The system is full-recourse so home owners will do what they can to prevent delinquency. Banks will also work hard with customers to keep them paying their mortgages, even if they are insolvent, and there is some scope to restructure loans (although I would not expect mortgage forbearance), extending duration and/or moving to IO. Unemployment is mercifully low, but a lift in unemployment from here is a key risk. And any cycle would likely play out over several years (as we saw in dairy farming in NZ) and that would cushion the blow. Banks remain well capitalised and well funded and highly profitable; I think they can easily absorb a shock. NPL’s took about 3 years to rise in the wake of the GFC, peaking at about 2.3% of bank assets. Maybe we see a similar cycle?

      • The Travelling PhantomMEMBER

        I wish someone can/do a post with such depth regarding the Aussie market.
        This fella beats DLS and LVO combined
        Not to mention without the sensationalist titles they use but no much substance sometimes in the article

  7. Hugh PavletichMEMBER

    Breaking news: Kiwi consumer confidence plummets as cost of living squeeze goes on …

    Westpac McDermott Miller Confidence survey at lowest level ever as pessimism bites in NZ … David Hargreaves … Interest Co NZ

    The cost of living crisis is biting – and boy are we getting grumpy about it.

    Consumer confidence in New Zealand has plummeted.

    The latest Westpac McDermott Miller Consumer Confidence Survey has just recorded the lowest reading on NZ consumer confidence since the survey began in 1988, which given that the survey period has included the gloom and doom that enveloped NZ after the 1987 stock market crash, and the Global Financial Crisis of 2008, is pretty remarkable.

    The post-stock market crash period and post GFC periods are the only two times in fact when confidence levels have been close to as bad as they are now.

    The survey’s consumer confidence index dropped sharply in the June quarter, falling 13 points to a level of 78.7, its lowest level ever. … read more via hyperlink above …

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