Reserve Bank “overshoot” to pummel New Zealand’s housing market

According to economist Tony Alexander, New Zealand mortgage rates are rising at their fastest rate on record at more than triple the pace of the tightening cycle between 2004 and 2008. Alexander also believes that the Reserve Bank of New Zealand (RBNZ) is at grave risk of overshooting, which will drive a deeper economic contraction and housing market downturn than necessary:

Here in New Zealand we already have fixed mortgage rates 3% – 3.5% above their levels of just over a year ago. The last time monetary policy was in a proper tightening cycle from 2004 – 2008 it took over three years for this to happen.

The tightening this time around is running at triple the pace of the last one.

New Zealand mortgage increase

Because central banks have credibility to rebuild after poor policy implementation last year, and because they see themselves as saviours, they also see themselves as rightful punishers – and that is the story for 2022. The risk is they overshoot and unnecessarily depress their economies, including our own. But we’ll just have to wait and see if the Reserve Bank truly stuffs things up again or not. The record so far is quite bad.

The impact of the RBNZ’s aggressive tightening is already being felt in the housing market, with the national median house price down 9.2% from its November 2021 peak in May, and the stock of unsold homes swelling.

The value of mortgage commitments also plunged 29% in the year to May 2022, representing a sharp reversal from the 128% annual mortgage growth recorded in May 2021:

New Zealand mortgage commitments

Indeed, the latest figures from property website Realestate.co.nz shows that the number of homes available for sale across New Zealand has almost doubled over the last 12 months, and asking prices are tumbling.

The average (non-seasonally adjusted) asking price of properties available for sale on Realestate.co.nz at the end of June was $922,432, down a hefty 7.2% ($72,553) from its peak of $994,885 in January.

Average asking prices are now declining across all of the main urban regions, with prices across Auckland – New Zealand’s biggest city – down 8.8% ($112,209) from their peak.

This is only the beginning. The RBNZ’s ‘forward track’ guidance signaled that official cash rate will lift from its current level of 2.0% to 3.9% by June 2023.

Since the majority of New Zealand borrowers have taken out fixed rate mortgages of two years or less, this means Kiwis that originated mortgages at rock-bottom pandemic rates have yet to impacted by the RBNZ’s aggressive monetary tightening.

This situation will change at the end of this year when these low fixed rate mortgage terms begin to expire and borrowers are required to refinance to significantly higher (double) mortgage rates. Then the impact of the Reserve Banks monetary tightening will truly be felt across the economy via a sharp contraction in consumer spending.

Unconventional Economist
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Comments

  1. pfh007.comMEMBER

    If the NZRB increases interest rates it might have a negative effect on those asset prices that have been inflated with excessive private bank credit.

    Goodness!

    What a calamity. Who knows NZ might take advantage of the situation and dig out some old books and work out how to manage an economy that does not depend on pumping debt into households to punt on property.

    The end of the monetary policy maniac era is proving deeply shocking to some.

  2. Hugh PavletichMEMBER

    The primary role of the Reserve Bank is to maintain the CPI between 1 and 3 per cent … around 2 per cent over the medium term.

    Obviously it has much more restraining to do going forward.

    The Reserve Bank does not have a mandate to target housing inflation … just general inflation.

    The IPSOS Issues Monitors are very clear that general inflation and housing inflation are THE TWO major concerns of New Zealanders.

    While the Reserve Bank will do what’s required to bring general inflation back in to the target range within a reasonable time, thankfully, the grossly overheated 9 Median Multiple housing market is building its way out of the bubble. Stats NZ May Building Consents reports today New Zealand has now hit a whopping consent rate of 10 units per 1000 population per annum … likely well ahead of any other country within the OECD.

    Little wonder rentals availability is increasing with rental rates now falling too.

    On a a price to income basis, the NZ Median Multiple (house price to income) is about double the size of Irish one that bust in 2007 … NZs peak at 9 Median Multiple with Irelands 4.7 tumbling to 2.8 across its metros by the 3rd qtr 2013. By various measures New Zealand’s bubble has burst between 5 – 9 per cent since November 2021 and is deflating around 2 to 3 times faster than the Irish bubble did …

    Helpful links …

    Demographia International Housing Affordability: All Editions ( access too ‘Interest Co NZ Median Multiple’)

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

    Housing Bubbles Wikipedia (check out historical housing bubbles deflation velocity)

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

    Stats NZ Building consents issued: May 2022 (released today … check in particular ‘consents rate per 1000 population per annum’ performance … and ask economists to compare with all others in the OECD)

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

    Bloomberg recent OECD Housing Report … with New Zealand the riskiest housing market …

    https://www.bnnbloomberg.ca/world-s-bubbliest-housing-markets-are-flashing-warning-signs-1.1782289

    • pfh007.comMEMBER

      Hugh,

      Good to hear that finally NZ are building plenty of housing and it is improving the availability of housing to own and rent.

      No surprise that is also having a good effect on prices.

    • Hugh your data for Ireland is patently incorrect, why peddle nonsense./
      Out of curiosity , why don’t you post the number of dwellings/housing stock per 1000 population for New Zealand and provide comparisons .

      • Hugh PavletichMEMBER

        P …

        a. Happy with the Irish info. if you are not suggest you communicate with Wendell Cox at Demographia. It has been around a very long time.

        b. Regarding consent / approval vols and rates, I’m sure there are researchers out there willing to generate and share this information.

        c. The ‘deflation velocity’ info only came to my attention today. I look forward to others research / comments on this important issue. And your views too P !

        • Tony Alexander the economist , who this article refers to , the same you linked to in a previous posts, the former BNZ chief economist, states “The period of falling prices is likely to be over quite quickly” and “We might even see the old view that house prices should be three times incomes because that is where they were in the modern dark ages up to the late1980s.
          Prices are not going to go back so far that we get anywhere near close to that ratio and forces are already in play to strongly limit the extent to which prices fall this cycle and the duration of the period over which these declines will occur.” and to reinforce When the turning point in the cycle comes it will not remotely involve a massive correction in the ratio of average house prices to average household incomes”
          Dwellings /1000 , a very simple metric as simple as supply/demand.
          Europe https://www.statista.com/statistics/867687/total-number-dwellings-per-one-thousand-citizens-europe
          https://www.oecd.org/els/family/HM1-1-Housing-stock-and-construction.pdf and slightly dated
          https://www.helgilibrary.com/indicators/dwellings-per-1000-people
          New Zealand as of the quarter ended 2021, using current Stats NZ ( demography data) has a dwellings /1000 inhabitants of 387/1000, consistent with the above.
          Ireland , is in the midst of another devastating housing crisis, a chronic housing shortage thru years of undersupply and prices have surged as a result .Home ownership rates have slumped. Dwellings/1000 over 400.

  3. Hugh PavletichMEMBER

    INTRODUCTION – DEFINITION OF AN AFFORDABLE HOUSING MARKET

    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.

    From the time post WW11 when Bill Levitt created the modern housing production industry (consider too how cars / automobiles pricing and broad performance have improved since that time … as just one example of many) when he provided new 80 square metre homes on 700 square metre sections for about $US9,000 to SINGLE EARNER families earning on average $US3,500 per year outside New York.

    That was about 2.5 times annual household incomes … as explained by the Smithsonian Institution and Professor Barbara Kelly …

    This Man Is the Father of Modern American Suburbia … VIDEO (2.36 min) … The Smithsonian Channel

    https://www.si.edu/object/yt_ksmH5OcLQFw

    Expanding the American Dream … Barbara Kelly … Amazon Books

    https://www.amazon.com/Expanding-American-Dream-Rebuilding-Levittown/dp/0791412881

    DEFINITION OF AN AFFORDABLE HOUSING MARKET (google search … incorporated within all recent comprehensive Demographia International Housing Affordability Surveys)

    For metropolitan areas to rate as ‘affordable’ and ensure that housing bubbles are not triggered, housing prices should not exceed three times gross annual household earnings. To allow this to occur, new starter housing of an acceptable quality to the purchasers, with associated commercial and industrial development, must be allowed to be provided on the urban fringes at 2.5 times the gross annual median household income of that urban market (refer Demographia Survey Schedules for guidance).

    The critically important Development Ratios for this new fringe starter housing, should be 17 – 23% serviced lot / section cost – to balance the actual housing construction.

    Ideally through a normal building cycle, the Median Multiple should move from a Floor Multiple of 2.3, through a Swing Multiple of 2.5 to a Ceiling Multiple of 2.7 – to ensure maximum stability and optimal medium and long term performance of the residential construction sector.

    … so that today … different forms of dwellings should be about or below these Median Multiples to rate as ‘affordable’ …

    1. Standard detached housing should not cost any more than 3.0 times annual household incomes of specific metros.
    2. New fringe starter house and land packages should cost around 2.5 times … at development ratios of 20% serviced lot and the balance construction.
    3. Apartment / townhouses should be around 2.0 times … about 70% of detached housing.
    4. Fringe manufactured house (prefab) and land packages should be around 1.5 times.

  4. If you only have NZD$22 billion (USD ~$14 Billion) in foreign reserves, what happens if the banking sector goes tits up?

    • Hugh PavletichMEMBER

      V … Likely wish you had asked that question 20 and 30 years ago … I suppose.

      The days of grossly irresponsible easy money and reverse welfare are fading fast … thankfully.

      It is enormously heartening to see basic human rights restoring opportunities for the young, aspirational and disadvantaged … for a pleasant change.

    • It’s not really ‘our’ banking sector, it’s yours?

      The biggest banks by far are all Australian – ANZ, Westpac, BNZ (NAB parent) and ASB (CBA parent).
      So a banking crisis will affect the Australian economy, as well as the New Zealand one, when it arrives.

  5. Hugh PavletichMEMBER

    Slower, dearer, harder: Is New Zealand broken? … Kevin Norquay …Stuff NZ

    https://www.stuff.co.nz/national/300626919/slower-dearer-harder-is-new-zealand-broken

    A fix, or more bureaucracy? The health system reforms that no-one seems to want … Tracy Watkins … Stuff NZ

    https://www.stuff.co.nz/national/politics/opinion/300627797/a-fix-or-more-bureaucracy-the-health-system-reforms-that-noone-seems-to-want

    Even mediocre would be easier to bear: How NZ has lost its mojo … Oliver Hartwich … New Zealand Initiative

    https://www.nzinitiative.org.nz/reports-and-media/opinion/even-mediocre-would-be-easier-to-bear-how-nz-lost-its-mojo/

    17th Ipsos NZ Issues Monitor – June 2022

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

  6. Hugh PavletichMEMBER

    How is Auckland really faring in the housing market downturn? … Mitiam Bell … Stuff NZ

    https://www.stuff.co.nz/life-style/homed/real-estate/129102762/how-is-auckland-really-faring-in-the-housing-market-downturn

    Auckland’s housing market downturn is now well entrenched, with prices significantly down from the market peak and declines in most suburbs.

    The region’s median price has fallen by 13.5% from its November 2021 peak of $1.3 million, according to the Real Estate Institute’s latest figures.

    That has left its median at $1.12m in May, which makes it the only region where prices have dropped into negative territory on an annual basis. They are down 2.2% from $1.15m at the same time last year.

    But Auckland is a large and diverse region, and drilling into the figures more deeply shows different areas are more affected than others. … read more via hyperlink above …