New Zealand had one of the world’s fastest growing housing markets in 2021, with prices nationally rising 25%. However since November, house prices have fallen 2.6% across New Zealand, with every major market slowing:
After booming in 2021, New Zealand house prices are now falling.
All leading indicators are now flashing red, pointing to a significant house price correction.
First, New Zealand home buyer sentiment has collapsed with ASB’s “good time to buy a house” survey slumping to a 26-year (record) low:
Buyers pessimistic about New Zealand property.
ASB doesn’t mince its words:
When asked whether it is currently a good time to buy a house, our survey respondents have never been more definitive. A net 28% think it is a bad time to buy (7% think it’s a good time, 35% a bad time), the most negative reading for buyer sentiment since our records began 26 years ago.
And who could blame them? The housing boom has lifted prices to extremely stretched levels, mortgage rates are rising, and the weight of expert opinion is now warning of outright falls for this year.
Second, New Zealand mortgage demand has tanked, falling 21% in the year to January 2022, according to the Reserve Bank of New Zealand (RBNZ):
New Zealand mortgage commitments have crashed.
Given most New Zealanders purchase homes with a mortgage, the downturn in finance commitments is a bearish signal for house prices.
Third, New Zealand auction clearance rates have collapsed to under 25%, which is another bearish signal for New Zealand house prices:
Crashing auction clearance rates signal falling New Zealand house prices.
Finally, and most importantly, New Zealand mortgage rates are rising. As shown in the next chart, 3-year fixed rates have already risen 2%, whereas floating rates have risen 0.8%. This follows successive increases in the Official Cash Rate (OCR) by the RBNZ.
New Zealand fixed and floating mortgage rates are rising.
Economists across New Zealand are tipping another 1.75% (ASB’s forecast) to 2.5% (Westpac’s forecast) increase in interest rates from the RBNZ. The IMF is also calling for “significant increases” in the OCR.
Such a hefty rise in rates would pose a particular problem for recent New Zealand home buyers, many of whom are highly leveraged.
As shown in the next chart, one-third of mortgages taken out in 2021 (valued at $32.6 billion) were originated at debt-to-income ratios above 6 times:
Recent New Zealand mortgage borrowers are highly leveraged
This makes these borrowers extremely sensitive to rising mortgage rates.
Indeed, prominent New Zealand economist, Tony Alexander, believes New Zealand house prices face a “reality check” and will fall heavily in real terms over the next three years:
The housing market boomed beyond all reason, and now there is a reality-check underway involving a correction of prices back to more reasonable levels. We are not going to see houses suddenly move into “affordable” territory. But maybe three years from now things will look a lot different.
ANZ has already penciled a 10% decline for New Zealand house prices in 2022. However, if interest rates rise as fast as the more bullish forecasters like Westpac are predicting, the pending house price correction could easily turn into a deeper crash.
