This week’s REINZ House Price Index recorded the sharpest six month decline on record, with values down 9.6% nationally.
The plunge in values has obviously been driven by the Reserve Bank of New Zealand’s (RBNZ) aggressive monetary tightening, which has driven the official cash rate to 3.0%, up from 0.25% in September 2021.
New Zealand mortgage rates have soared.
Although the RBNZ has been at the forefront of rate hikes globally, and has increased rates by more than the Reserve Bank of Australia (whose cash rate is currently 2.35%), the impact of monetary tightening in New Zealand is actually more lagged.
Unlike Australia, where floating rate mortgages dominate, the bulk of New Zealanders are on fixed rate mortgages of two years or less. This means that New Zealanders that originated mortgages at rock-bottom pandemic rates have yet to impacted by the RBNZ’s aggressive monetary tightening.
The situation is about to change. According to new research from Westpac, “around 24% of mortgages will come up for re-pricing by the end of this year, and a further 23% by mid-2023”. Most of those borrowers “will face refixing at substantially higher interest… that’s 2 to 3 percentage points above what it was” when first originated:
New Zealand’s fixed rate mortgage reset.
Westpac estimates that “for the average household, the rise in mortgage interest costs will drain around $3,000 out of their wallets per annum”. However, this estimate includes households with no mortgage.
Therefore, the impact will be much more acute for pandemic era buyers that borrowed large sums to enter the housing market.
Westpac also forecasts that house prices will fall by 15% peak-to-trough, with values to bottom in 2023:
Westpac: New Zealand house prices to fall 15%.
Given New Zealand experienced one of the world’s largest house price booms over the pandemic, and New Zealand housing is among the most expensive in the world, Westpac’s forecast 15% decline in house prices looks conservative.
