New Zealand’s housing sector has been caught up in a tug of war between the demand and supply-side pressures since the onset of the COVID-19 pandemic. As the property market has begun to show some signs of a slowdown, many are hopeful that prices are nearing their peak. Additionally, some experts predict that prices could level down by 2023. In the meantime, it is crucial to examine how demand and supply-side factors have progressed.
Owning a house has increasingly become a challenge for an average homebuyer in NZ. The NZ housing market has gained the reputation of being one of the most expensive markets in the world. Since interest rates are being lifted this year, speculations are rife that property prices could plunge deeply, resulting in a housing market crash.
Although expectations of a price slowdown build up, experts anticipate affordability concerns to persist in the post-COVID era. However, it is worth highlighting that only a minor effect has been seen on the red-hot property market even though policy measures have tightened.
In the given scenario, let us understand how the demand-supply equation is taking shape in the housing market.
Reduced buyer demand
As housing prices rallied last month, buyer demand for property prices demonstrated a slowdown. A recent survey by the Real Estate Institute of New Zealand (REINZ) showed that house prices have been rising across various parts of the country, leading to dulled out demand in these regions. The survey revealed that 56 per cent of real estate agents reported an increase in house prices in November 2021.
On the market front, a net 46 per cent of agents reported that fewer people turned up at auctions last month, indicating slowing buyer demand. Moreover, a net 61 per cent of agents observed a decline in open home visits.
A crucial factor underpinning this reduced demand was the prospective buyers’ inability to secure funding from banks. These difficulties arose as banks applied debt to income ratios, evaluated expenses more intensely to meet requirements of the Credit Contracts and Consumer Finance Act, and stopped low deposit lending temporarily other than for new builds to meet fresh LVR (Loan to Value Ratio) requirements. However, much relief was offered in the form of increasing appraisal requests, more vendors stepping up with a realistic assessment of market prices and slowing price growth.
Easing supply pressures
Adding to the reduced buyer demand are the cooling supply pressures in the housing market. Data by a prominent property website (Realestate.co.nz) shows that new property listings increased by 9 per cent, year on year, in November. During the month, new listings rose to a record level of over 13,750, reflecting the highest number of new listings received by the website in any month of the year since October 2014. Additionally, the national housing stock, which measures the total number of homes available on sale over the month, also rose by 5.1 per cent year on year.
In Auckland alone, new listings rose by 10.4 per cent year on year in November. Altogether, a rise in listings points to a market where houses are being put up for auction faster than they are being sold out. This is especially beneficial for the buyers who get a larger stock to choose from, with the possibility of prices reducing to accommodate the excess supply. Looking ahead, the property market might correct itself and reach a lower average level of prices as competition on the demand side eases.
Rising interest rates
A range of factors in the financial sector could significantly impact the borrowing capacity of market participants. One such crucial force is the recent rise in interest rates by the Reserve Bank of New Zealand (RBNZ), which has triggered off a rise in fixed mortgage lending rates. This has come partly in response to increasing bond yields. There is a high possibility of a further increase in fixed rates if the interest rates continue to rise, which can put prospective buyers under stress.
As mortgage rates rise further, households might have to shell out a greater chunk of their income to pay off their debt. In return, property prices could spiral down quickly. Meanwhile, things might not be as rosy for the banking sector, even if their interest income rises. Besides, as banks usually have more loans than deposits, loan revenue could actually decline with an interest rate hike.
In a nutshell, the housing sector could continue to observe a highly volatile environment, as has been the trend in the industry for a long while now. As fears of a steep decline in prices are mounting amid rising interest rates, some respite is being offered by increasing listings and reducing buyer demand. Overall, these tailwinds might provide a soft landing to declining prices and safeguard the market from a crash induced by rising interest rates.