A superabundance of dampening measures, both at home and abroad continues to impact New Zealand’s economy with an easing effect on residential property values.

National sale figures from the Real Estate Institute’s (REINZ) Housing Price Index (HPI) show house prices have fallen 0.8 percent in May, representing the sixth consecutive monthly decline and a six percent regression from the previous peak.

Despite this, the monthly rate of decline has slowed recently, reflecting a controlled rewinding of pandemic stimulus-induced and out-of-cycle capital gain.

The deceleration of value regression similarly shows that buyers are beginning to take notice of improved affordability metrics, with anecdotal evidence suggesting purchasers previously shut out of the market because of rapidly rising prices, tough lending policy and a shortage of homes available for sale are finding new encouragement to transact.

This silver lining of sorts is also reflected in the latest GDP figures which show that while the economy shrank 0.2 percent in the March quarter, as the impact of inflation continued to erode consumer confidence, New Zealand recorded annual growth of 5.1 percent.

A bright spot for our economy continues to be strong employment prospects which have fortified an extremely shallow unemployment rate. This strength in the labour market is expected to remain the saving grace for asset markets and the broader economy as the ability to work goes some way to offset the higher mortgage lending costs that some 60 percent of borrowers will acclimate to by early next year.

Despite an air of uncertainty regarding future dynamics, the usual reasons for shifting home remain as families continue to expand and contract, while employment and lifestyle opportunities encourage migration both between and throughout our regions.

Observers say that the current market conditions offer a preferable time to take advantage of the “biggest listing jump in years” and the highest willingness of sellers to negotiate and secure a sale. With a likely uptake in interest from investors and owner-occupiers encouraged by the Reserve Bank’s (RBNZ) sidelining of debt-to-income (DTI) tools.

For the housing market and the months ahead, the RBNZ has indicated its intention to keep monetary policy tight as it seeks better alignment between supply and demand across the economy.

The rising cost of goods, services and debt will likely see dampened demand cause a return to more sustainable long-term interest rates, however, to the close of 2022 activity is likely to remain slow and somewhat steady provided global events do not escalate.

In-depth reports:

• In its quarterly Housing Confidence report, ASB Bank says Kiwi expectations for the housing market have shifted significantly and just 11 percent of its survey respondents now think house prices will increase over the coming year. There are, however, the first signs of improving affordability metrics beginning to filter through and we expect that buyers will become encouraged by increased opportunities for negotiation and more homes available for sale, underpinning a good level of activity through year-end.

• The latest building consents data from Statistics New Zealand (SNZ) shows while the number of new homes consented remains elevated, it is beginning to flatten off, falling 8.5 percent month-on-month in April. The data shows 50,583 new consents have been issued across the country over the past year (up 18 percent year-on-year). But while building activity is set to remain strong material shortages and a lack of skilled labour means activity is struggling to keep pace with consent issuance. This has caused extended project delays, leaving Kiwis with a large pipeline of to-be-completed projects reflected by an undercurrent of volatility in recent data releases.

• The latest HPI from CoreLogic has found house prices across the country fell another 0.8 percent in May with a cautious market sentiment resulting from rising interest rate expectations. While the RBNZ expects a value trough of around 12 percent by early next year, buyer attitudes will be the most valuable indicator of where the market is heading as recent surveys indicate fresh concerns about the rising cost of debt. Aware that more than half of New Zealand’s mortgage debt will be refinanced on higher interest rates by early next year, mortgage holders are adjusting their balance sheets with an impact on consumer spending – a key consideration for the RBNZ when setting monetary policy and the Official Cash Rate (OCR).

Topical articles:

• Independent economist Rodney Jones has highlighted the incompatibility between the RBNZ’s tightening monetary policy, while still running its Funding for Lending Programme (FLP). While tightening financial conditions by raising the OCR, the RBNZ continues to add money to the market through the FLP which reduces the cost of lending for banks and encourages lending to households by providing funds at cheaper rates than those in the current market. Jones says banks either choose to pass these on to borrowers or keep surplus, expanding their profit margins. The issue raises the question of incompatible policy and exemplifies the push-pull mechanisms at play through the economy and housing markets as dampening measures are being offset to a small degree by still-in-place emergency pandemic policy settings.

• The government has announced changes to its responsible lending regulations which have been blamed for hampering residential sales activity over the last seven months. Come July 7, changes will be finalised which aim to water down some of the more controversial aspects including the investigation of borrowers’ current living expenses based on their recent bank transactions. Following the implementation of the Credit Contracts and Consumer Finance Act (CCCFA) reports emerged of restrictive bank analysis and an increase in mortgage application rejections, which saw a spike in consumer lending from second-tier and non-bank lenders. The changes recognise the initial regulations have been too restrictive and should result in breathing room for first-time buyers, retirees and those with unsecured income who are reported to have been worst affected.

• Global independent economic researcher Capital Economics says house prices in New Zealand will continue to fall, negating the need for further rate rises over the next year. They They forecast this value regression to be the catalyst for a 75-point drop in the OCR by the second half of 2023. While noting the downturn could see house prices fall up to 20 percent across Aotearoa, researchers report this would only ‘restore affordability to its late 2021-level’ meaning house prices are still hugely disproportionate relative to household incomes.

• Three of New Zealand’s main banks have raised the test interest rates they use to assess whether mortgage applicants can service debt. ANZ, BNZ and ASB have revealed they are testing would-be borrowers above 7.3 percent, up from 6.7 percent in April. The move reflects the banking sector’s expectation that mortgage lending rates will continue to rise over the coming year, however, provides an important buffer for new borrowers against defaulting on their loans. Testing applicants at rates higher than those anticipated also offers valuable safety for households and the wider housing and financial sector.

• As New Zealand prepares for a full reopening of its international border, short-term accommodation owners are looking forward to welcoming guests back to tourist hotspots, with increased visitation potentially spurring interest in regional housing markets. Data from accommodation provider Bachcare showed a home in the beachside Bay of Plenty town Mount Maunganui earned some $81,000 last year – more than the region’s average salary, illustrating the strength of demand for accommodation options in the region.