Day of reckoning arrives for New Zealand’s insane housing market

The Reserve Bank of New Zealand (RBNZ) has released research showing that New Zealand experienced the sharpest appreciation in real house prices across the developed world between 2008 and 2021:

Real house prices

New Zealand the house growth leader.

New Zealand’s house price-to-rent ratio also rose the most across developed nations, meaning “the growth in house prices since the GFC has outpaced the growth in rents in New Zealand, more so than other countries in our sample”:

Price-to-rent ratio

New Zealand housing most expensive relative to rents.

In a similar vein, New Zealand’s house price-to-income ratio rose the most in the developed world:

Price-to-income ratio

New Zealand housing most expensive relative to incomes.

Together, figures 2 and 3 indicate that New Zealand has one of the world’s most overvalued housing markets.

The RBNZ believes two factors explain the extreme growth in New Zealand house prices relative to the other developed nations.

First, New Zealand’s population growth was the second strongest in the developed world, behind Australia’s, due to its mass immigration policy:

New Zealand has been at the upper end of the range for much of the past 3 decades when it comes to population growth… New Zealand’s population, buoyed by high immigration, has grown rapidly…

Population growth in other economies has been relatively weaker, and even negative in Germany, France and Italy during several episodes in the last 15 years.

Second, and more importantly, New Zealand experienced the sharpest reduction in mortgage rates following the Global Financial Crisis in 2008:

The New Zealand mortgage rate started at a higher level than those in other economies in 2008… By 2021, the New Zealand rate appears to have fallen the most in our sample; about 500 basis points.

Putting both factors together produces the next scatter plot chart:

Population, mortgage rates and house prices since 2008

High population growth and falling mortgage rates fueled New Zealand’s house price boom.

According to the RBNZ:

Not merely has New Zealand experienced the strongest house price increase since the GFC, it has also been accompanied by almost the steepest increase in population and the strongest decline in mortgage rates across our sample economies.

The implications going forward should be obvious.

The RBNZ has commenced an aggressive monetary tightening cycle, already increasing the official cash rate (OCR) by 2.25%. It has also flagged further aggressive rate hikes, promising “to maintain its approach of briskly lifting the OCR until it is confident that monetary conditions are sufficient to constrain inflation expectations and bring consumer price inflation to within the target range”.

Given falling mortgage were a key driver of New Zealand’s unprecedented house price boom, it stands to reason that aggressive increases in mortgage rates will necessarily have the opposite effect of driving house prices sharply lower.

Interest rates are a double-edged sword for the housing market.

Unconventional Economist
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  1. Turns out a free lunch isn’t so free after all.
    For some reason the lesson keeps needing to be re-learned.

  2. Hugh PavletichMEMBER

    The RBNZ report does discuss ‘supply; too Leith !

    I do hope you cover that as well.

    Greater Auckland and Greater Christchurch have been exposed to the same interest rates environments … and pricing and affordability are very different …

    Interest Co NZ – Median Multiples,on%20the%20US%20housing%20market.

    Some recent ‘supply’ reporting on the south county of Christchurch, Selwyn Council Area may be of interest …

    Up to 1000 new homes approved for outskirts of Christchurch despite city opposition … Liz McDonald and Amber Allott … Stuff New Zealand

    New housing in Selwyn district. About 10,500 new residential sections are either approved or going through the rezoning process in the district. … read more via hyperlink above …

    South Island’s biggest bulk retail centre planned for Rolleston (part of Selwyn County, Canterbury province) … Liz McDonald … Stuff New Zealand

    While the residential consents per 1000 population per annum (standard industry measure … employed each month by Stats NZ) has now reached 10 / 1000 for New Zealand (likely the highest in the OECD … by a country mile !) Selwyn Council is a staggering 26 / 1000.

    Selwyn County is part of the province / region of Canterbury, which has a consent / approval rate of 13 / 1000 … the peak for New Zealand reached in the December year 1973 … near 50 years ago (refer historical graph Stats NZ article at bottom) …

    Building consents issued: May 2022

    • Hugh PavletichMEMBER

      Rise in new homes consented per 1,000 residents … Statistics New Zealand

      Consider too the clear structural definition of an affordable housing market, posted here at MB a little while ago …


      As sound money is restored with the switch from QE to QT in conjunction with the normalization of interest rates, some may need to learn fast just what a structurally sound and affordable housing market is.

      Bear in mind that the provision of affordable housing should be (if the politicians and planners hadn’t screwed it up) a straightforward formulaic business. … read more via hyperlink above …

      • “The number of dwellings per thousand inhabitants increased between 2011 and 2020 in all but six
        countries: Croatia, Ireland, the Czech Republic, Iceland, New Zealand and Luxembourg.” OECD March 15 2022

        As of March 31 2022( Statistics New Zealand), the number of dwellings /1000 in New Zealand is 389, substantially below all of the above countries within the ‘study” Germany 514, France 548,Spain 545, Norway 484, Denmark 463, United Kingdom 435, United States 438, Canada 435 and Ireland 422 Australia 410. The OECD average 468/1000. Europe 495/1000
        The RBNZ does not set immigration policy not does it build homes..

  3. SkepticviewerMEMBER

    Perhaps something radical should have been done during the insane increase in house pricing but of course, it was all part of the Key plan. Now the Quad wamy of the brain drain, third worlders wanting to get to Australia instead and poverty-level wages, as well as crushed or drained for-profit infrastructure, are tearing NZ society apart at the ground level

  4. Hugh PavletichMEMBER

    From 2009 … what the venerable economist Dr Thomas Sowell (now 92) had to say about the housing boom and bust at that time …

    Thomas Sowell on the Housing Boom and Bust … Peter Robinson of Uncommon Knowledge Programme at The Hoover Institution … Youtube

    The Housing Boom and Bust … Thomas Sowell … Amazon

    Thomas SowellTV … Youtube

    Thomas Sowell … Wikipedia

    • Replace economist with moralizing Ideologue for Sowell … Hugh … anywho the run up in NZ RE costs was a direct result of hot money coming in from Atlantic nations rich looking for a bug out place due to the advent of the Iraq war and fears of terrorist attacks. Further enabled by the crazy wild wild west free market antics rolled out by your man Key. Which allowed unfettered money laundering shadowy world of offshore finance games.

      The best bit is once the pump is primed everyone dog piles into it and creates its own demand pull, next thing you know and investors start eating all the REMBS for income streams of duration and we all should know how that worked out in the GFC – contagion and a boat load of perverse incentives from top to bottom facilitating it all. At the end of the day this then effects all the other local/regional businesses as the money moves around e.g. watch the job market as the RE sector goes pop and then it matters not how cheap RE is ….

      Sowell … ugh … don’t know anyone that reads that guy anymore …

  5. Number one reason given for price rises is immigration, except that the period of highest price growth rates was when immigration went into reverse during covid. Actual reason is always loans getting bigger.

  6. Hugh PavletichMEMBER

    NZ property prices have the largest monthly drop on record: Trade Me … Brianna McIlraith … Stuff NZ

    The national average asking price for a property saw a record-breaking drop in June, falling 3%, or $24,550, in just four weeks, according to the Trade Me Property Price Index.

    Trade Me Property sales director Gavin Lloyd said after creeping closer to the $1 million mark over the past 12 months, in June the average asking price for a property in New Zealand dropped to $925,150.

    This was significantly lower than the all-time high of $971,450 seen in March.

    “The national average asking price has not been this low since October 2021, and this marks the second record-breaking price drop in a row following May’s 2% month-on-month dip,” Lloyd said. … read more via hyperlink above …
    New Zealand sees largest drop in property prices on record, Trade Me figures show … Mark Quinliven … Newshub
    Liam Dann: Is a housing crash the secret weapon in war on inflation … NZ Herald
    … behind paywall …

    • Hugh PavletichMEMBER

      Construction slowdown: New build inquiries drop by up to 80 per cent, more companies could go bust alongside job losses … Carmen Hall … NZ Herald
      … behind paywall …

      A building industry leader says inquiries for residential new builds have plummeted between 70 and 80 per cent – prompting fears of job losses and predictions some companies will struggle to survive the year.

      Skyrocketing material costs, tougher bank lending, higher home-loan interest rates and soaring inflation, which has hit 7.3 per cent, are being blamed for the massive drop in inquiries.

      Master Builders Association national vice-president Johnny Calley said the slowdown had the potential to “wreak havoc” on the economy.

      Another building company boss based in Tauranga said sales were down to levels last seen in 2008 when the Global Financial Crisis hit and predicted “real hurt” for the sector when house and land packages sold last year were built.

      The Government says it knows construction is “facing accelerating headwinds” and it is working with the sector.

      Calley, of Tauranga-based Calley Homes, warned some residential construction companies that did not respond to the sudden decrease in demand may not survive. … read more via hyperlink above …

      • Who cares about supply of RE when it won’t last 25 years and is subject to location and how AGW plays out …. so much for the family/community sales tactic in getting people to sign up for 25 odd years of debt [investor income flows] on a depreciating consumable just to “feel good” about themselves with the head winds starting to blow endlessly ….

        See that heat thingy in Europe ….

  7. What about property investors?
    What proportion of these were bought by infestors?
    Rates going down no one complains…