Why NZ Housing Market May Send A Warning Signal To Other Economies

Wednesday, 27 July 2022, 6:25 am
Press Release: Kalkine

Summary

• The New Zealand housing market has shown signs of a rapid decline, with prices falling by 2.3% in the three months through June.
• Economists across the globe fear that the New Zealand housing market might foreshadow what they could experience in the coming months.
• Auckland has consistently bucked the trend, with the city expected to skirt any price corrections.

The New Zealand housing market faces yet another challenge of plunging house prices. Interest rate hikes by the central bank have led to a housing price fall unseen in 13 years. CoreLogic data suggests that prices fell 2.3% in the three months through June, the biggest quarterly drop since 2009. These reports have set fire to burgeoning concerns about where the market is headed and what it may indicate about the condition of other economies.

Higher interest rates, tighter lending conditions and increasing affordability constraints have spiralled into a slowing market. Rising interest rates have taken away a major chunk of housing demand. Experts suggest that demand may not recuperate till interest rates start to fall again.

However, for now, the Reserve Bank of New Zealand (RBNZ) is expected to tread on its monetary tightening path to keep inflation under control. Further interest rate hikes are expected, pushing mortgage rates higher. Thus, the saga of soaring NZ housing prices has come crashing down to an abrupt stop, with future rate hikes posing as road bumps for the market.

GOOD READ: New Zealand inflation hits 32-year high at 7.3%

Alarm bells ringing across economies

New Zealand’s housing market has been a colourful story to tell, as the country witnessed one of the highest price surges ever seen across the world. The red-hot property market seen during the initial days of the COVID-19 spread showcased a worrisome picture for the overall economy. However, even as the housing market turns cold, economists fear that the outcome could be equally damaging.

Many other countries face similar situations as rising inflation has forced many central banks to raise interest rates. Some countries, such as the United States and Australia, have begun their tightening cycles much later than New Zealand. These nations may benefit from the foresight provided by the NZ economy, with Australia especially being in a similar situation.

Property prices in Australia also soared at the same rate as the New Zealand housing prices. However, due to faster monetary tightening by the RBNZ, property prices have turned around quicker than in Australia. However, the Reserve Bank of Australia (RBA) has also taken an aggressive stance on interest rates. The RBA delivered two back-to-back 50 basis point rate hikes over the last two months.

Meanwhile, many economists suggest a housing market downturn is inevitable across geographies. House prices are set to reverse as rapid interest rate tightening becomes a norm across economies in the current period. Though most economies might be able to skirt the possibility of an economic recession, some amount of slowdown is sure to seep in.

Auckland lying below trend

Buyers in Auckland seeking a price decline might be met with an unexpected surprise. The Auckland housing market is not expected to observe massive drops in prices. The historical trend for the city suggests that prices may not be subject to much of a correction even as the rest of the country observes a crashing market.

Alternatively, regional markets are expected to be in a more vulnerable position as housing prices might take drastic downward swings. A correction may be more pronounced in the regions of Wellington, Gisborne and Hawkes Bay.

Regions across New Zealand are not expected to show much of a disparity. The exception lies in the case of Auckland, which remains comfortably below trend. Prices across the city remain elevated compared to their normal levels relative to the rest of the country. Thus, Auckland buyers might be left unsatiated in the middle of the current housing price decline.

Experts suggest that further declines in house prices can be expected across New Zealand. However, a more concerning situation may arise if households default on mortgage debt. A high default rate could take the economy down and create severe chaos. However, these fears may not turn into reality due to the strength shown by the labour market.

New Zealand’s low unemployment rate and a tight labour market might just alleviate the possibility of an economic recession. However, housing market players are already locked in a serious situation, with no clear resolution in sight. Rising interest rates would act as a double-edged sword in a period of slowing demand and soaring inflation. Thus, the following months would be critical in understanding how New Zealand’s post-COVID recovery has turned out.

GOOD READ: RBNZ delivers another rate hike, OCR up 50 bps

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