ANZ Property Focus

Reflecting frontloaded OCR cuts, our expectation for a faster economic recovery from next year, and signs that housing market momentum is starting to shift, we’ve upgraded our house price forecast. While further falls are likely in the near term, we now expect house prices to rise 6% over 2025 (previously 4.5% y/y), and a further 5% over 2026. While lower interest rates and easing credit conditions are strong tailwinds for housing demand, the recovery faces plenty of headwinds too, with labour market conditions continuing to deteriorate, population growth slowing, and affordability stretched. With many moving parts affecting the housing market outlook, we see two-sided risks around our central forecast. In this month’s Feature Article, we detail the risks to our forecast by going through the each of the drivers of house prices in turn.

The REINZ House Price Index lifted in September for the first time since April, but underlying housing momentum remained sluggish. Sales volumes fell, days to sell lifted and the number of listings on the market rose further. There is significant uncertainty around the likely pace of recovery in the housing market as mortgage rates continue to decline, with plenty for forecasters to weigh up: falling mortgage rates, rising unemployment, a fundamental undersupply of houses, changes in tax policy, affordability constraints, and of course “animal spirits”. We certainly see two-sided risk around our forecast for house prices to stabilise around the end of this year and rise 4.5% over 2025. 

This month we look at housing market developments across 14 key regions. Now that interest rates are normalising after the post-COVID rollercoaster, regional over- or under-performance is worth investigating. We evaluate regional house prices, indicators of housing market tightness, key regional economic indicators, and regional measures of housing affordability. Most regional housing markets are currently on a loosening trajectory, though house price cycles have been far more pronounced in some regions than others. The West Coast takes the prize for the strongest performance, with house prices up around 65% from December 2019, while Auckland has seen the weakest growth, with prices up only around 10% over the same period. How does your region stack up? See this month’s Feature Article.

The housing market continued to weaken in July, with the REINZ House Price Index falling 0.6% m/m. Subdued sales over recent months and rising listings on the market suggest weakness is likely to persist in the near term, with prices likely to correct further to clear the backlog of supply. But a lot has happened in the past month that makes the July market snapshot feel like ancient history. With the RBNZ kickstarting its easing cycle this month, and mortgage rates having already responded, we expect dynamics in the market to shift later this year, with a recovery in house prices over 2025. Our updated projections show mortgage rates falling to around the level that prevailed in the middle of last decade. Mortgage rates are an important driver of the housing market, but they aren’t the only driver. There’s still plenty of strong headwinds facing the market. We compare the current landscape to the conditions that prevailed back in 2015, highlighting that risks to the housing market certainly aren’t one-sided.

New Zealand citizen departures to Australia are picking up sharply as the local economy underperforms. With so many Kiwis jumping the ditch, it’s worth asking what kind of housing market they might be jumping into. This month we open that can of worms to investigate that very question. While we don’t get all the way to the bottom of the can (this is a feature article, not a book), we discover a few interesting differences. And in terms of the relative housing outlooks, it appears that Australian house price inflation is set to outpace that in New Zealand for a little while yet. 

Following May’s weaker-than-expected REINZ data and taking signal from the forward indicators, we’ve downgraded our house price forecast slightly. We now expect house prices to rise just 1% this year vs 3% previously. It's worth noting that while a downgrade from 3% y/y to 1% y/y could give the impression that we’re able to forecast the housing market with a high degree of precision, we can’t, and nor can anyone else. But we’ve crossed a threshold warranting a forecast update, and the upside and downside risks feel more balanced around a 1% y/y rise this year than a 3% lift. In the big picture, this is only a tweak to our forecast, and it is probably best thought of as a slight delay to what we were previously expecting: modest growth, with gradually falling mortgage rates offset by softening household income prospects (including job security fears) as the labour market cools. But as always, there’s a lot more to the housing outlook than that!

Housing affordability deteriorated significantly following the pandemic, with house prices relative to incomes touching highs never seen before. It’s been a particularly bumpy ride for new entrants, who have not only had to save a larger proportion of their income to come up with a deposit (and/or wait longer), but who now face a much higher debt-servicing cost as a share of income compared to the decade preceding the pandemic. The good news is that the worst is hopefully behind us. But international comparisons show that some economies may have it even worse, implying that the recent peaks in unaffordability seen in NZ may still be shy of any “natural limit”. We present a range of affordability indicators as well as a weighted affordability index based on some of these measures. Plugging in our forecasts show that the only major relief on the affordability front over the next few years is expected to come via the debt-servicing channel as mortgage rates decline. But overall, our outlook implies housing will remain less affordable over the next few years than it was prior to the pandemic.

House prices came in a little softer than we anticipated in the first quarter of the year, and forward indicators suggest the second and third quarters could be just as soft. Auckland often leads nationwide housing outcomes, so this month we take a closer look into what some of the Auckland indicators are saying about what might lie ahead for the country as a whole. Given Auckland tends to get the lion’s share of net migrants, this regional lens on the housing market is particularly important in the context of current surging net migration. However, we find little evidence in rental yields to suggest migration is about to drive a surge in investor demand for houses. In fact, rental yields in Auckland have been somewhat muted in recent months compared to the national average. All in all, indicators of market tightness in Auckland, and the rest of New Zealand for that matter, are running on the colder side of tepid, and that points to some downside risk around our house price forecast for a modest 3% rise in prices over 2024.

Is it better to buy a house, or rent it? It’s a question a lot of people grapple with. As always, the ultimate answer is “it depends!” but in this article, we shed some light on the question by taking a long-term perspective. In what follows, we take data from 1999 to 2023, make a bunch of assumptions about the outlook, and compare cash flows of someone who buys a house versus someone who rents. The upshot? When borrowing at a high LVR (we assume 80%), servicing a mortgage and paying other ownership costs will generally be more expensive than renting in the first years of ownership. But eventually, homeownership costs will typically be lower than renting. Therefore, to the would-be borrower-buyer, what’s best does depend to some degree on how long you are willing to wait to break even. But as we show, the amount of time that takes depends on a bunch of variables and assumptions, and how you frame what ‘breaking even’ actually means. Do you care about annual cash flows, cumulative cash flows, or discounted cash flows? And what about capital gains and opportunity costs? We discuss the lot. But it’s important to note that the mythical “median person” in our analysis is likely to differ greatly from personal experiences. And as with most choices in life, whether big financial decisions work out well will inevitably partly depend on luck.

The housing market looks stagnant. While January house prices were stronger than we expected, sales were abnormally soft, listings continue to rise and days to sell are back near their 2022 peaks, especially in Auckland. We are expecting the Reserve Bank of New Zealand (RBNZ) to lift the Official Cash Rate (OCR) two more times to combat increasingly stubborn domestic inflation. Homeowners should be conscious that mortgage rate cuts in the near future are not a sure-fire bet, as the RBNZ will be unwilling to provide mortgage rate relief until they’re confident that inflation will stay in their 1-3% band. Our expectations for further lifts in the OCR put the risk of further house price falls back on the table. At this stage, it’s a risk only, because the HPI remains robust in the face of a deteriorating outlook. We still expect house prices to go broadly sideways over the first half of this year, but the picture is looking a lot less certain than it was at the end of last year.

Construction may be about to bottom out. Fair to say, the housing market rebound has been underwhelming since it found a floor earlier than anticipated in April. However, the outlook for construction is nonetheless intriguing, as population growth and still-high interest rates square off. While consents are yet to find a floor, builders in the ANZ Business Outlook survey became much more optimistic some months ago, and their colleagues in the NZIER QSBO now concur. That suggests that consents and construction activity could soon base. The RBNZ is relying on a prolonged slowdown in residential construction as part of their plan to bring down domestic inflation, and the risk is that the slowdown will be sharper but not as prolonged as the RBNZ expects. The implications for the inflation outlook are unclear.

December 2023: Renovation nation (PDF 1.74MB)
Kiwis love a good renovation. Buying a run-down villa and doing it up has been a popular project for Kiwi families for decades. This month’s feature article explores consenting, lending, and construction data to see how the pandemic and recent elevated interest rates have affected Kiwis' appetite for renovations. The upshot: high interest rates have squeezed people’s ability to afford a do-up, with sharp rises in construction costs not helping the case for a new bathroom or kitchen. As inflation eases and interest rates decline, we expect demand for houses in need of some DIY to pick up, as first-home buyers become a larger share of the market

 

November 2023: A spring chill (PDF 1.59MB)
House prices rose in October, with the REINZ house price index rising 0.4% m/m (ANZ seasonal adjustment), a touch weaker than we expected (figure 1). It’s not just house prices that were on the weaker side this month; the forward indicators of sales and new listings showed that there’s perhaps some further softness to come. Accounting for the starting point surprise, and adding a little more election inertia into our near-term view, we have revised down our 2023 house price forecast and now expect house prices to fall 0.4% in 2023 (3-month moving average), versus a 0.2% rise previously. If momentum doesn’t recover after the election-related dust has settled, our 2024 forecast is on thin ice for a downgrade too (we'll get our first post-election read in December). This month we changed our Official Cash rate forecast and now expect the next move on the OCR to be lower, albeit with cuts one quarter later than previously (Q1 2025). However, insofar as markets anticipate cuts, fixed mortgage rates are likely to fall before then.

 

October 2023: New faces, not many new places (PDF 1.43MB)
Migration into New Zealand is at record levels. Over the last year more people than live in Palmerston North or New Plymouth have moved here on net, after accounting for departures. All those migrants need a place to live and we are not consenting and building enough new dwellings to keep pace. The extra demand for places to live is putting upwards pressure on house prices and rents, especially in Auckland. At the same time, large numbers of New Zealanders are leaving the country permanently, further raising property market churn. Net migration also boosts labour supply, dampening wage growth, so the net impact on inflation and therefore mortgage rates is ambiguous. The RBNZ is assuming it will be a small positive net impact, but time will tell. 

 

September 2023: Going up (PDF 1.30MB)
We’ve revised our near-term house price forecast upwards and now see prices lifting around 4% (previously 3%) over the second half of this year, with house prices rising at around their current pace until autumn next year. Underpinning recent momentum, first-home buyers appear to have re-entered the market after a long hiatus. We don’t think recent levels of house price growth will be sustained over the second half of next year, as unemployment rises while interest rates remain high. Our outlook is for annual house price inflation to come in around 5% over 2024, then moderate to around 3% in 2025. If upside housing pressures result in upside CPI inflation pressures, the RBNZ is likely to respond with hikes, stopping the housing upswing in its tracks. Be careful what you wish for.

 

August 2023: Regional revelations (PDF 5.53MB)
This month we look at housing market developments across 14 key regions. Now that the house price cycle has convincingly turned a corner at the national level, regional over- or under-performance is worth investigating. We evaluate regional house prices, indicators of housing market tightness, key regional economic indicators, and regional measures of housing affordability. Only one region is currently experiencing positive annual house price inflation (clue: it rhymes with ‘best’ and ends with Coast). And while that region also happens to be experiencing some of the strongest retail spending relative to trend, it’s not the region with the lowest unemployment rate (Wellington) nor the region with the highest consents per capita (Canterbury). How does your local market stack up? See this month’s Feature Article.

 

July 2023: Running start (PDF 1.20MB)
House prices broke out of an 18-month downtrend in June, rising 0.7% m/m (sa). This was on the slightly stronger side of our expectations. We remain cautious about the outlook, and suspect that the running start to the upturn had some one-off factors nudging it along. But not all the data we monitor concurs. Auction clearance rates in particular suggest our forecast for around 3% growth in house prices over H2 is a touch soft. That may well be true, but we can’t lose sight of the broader economic backdrop: the RBNZ is seeking to engineer a looser (and more sustainable) labour market (ie higher unemployment) in order to tame CPI inflation, and if it doesn’t achieve this with the OCR at 5.5% it will hike by more. Our expectation is that CPI inflation will prove harder to tame than the RBNZ currently anticipates, pushing it back into hiking mode come November. That’s likely to lead to renewed upwards pressure on mortgage rates later in the year, and could even see housing headwinds dominate tailwinds as we head into 2024.

 

June 2023: Sure to rise? (PDF 2.12MB)
This month, we run a statistical analysis to try to disentangle the various drivers of house price inflation over the past 30 years. We find significant impacts from net migration, mortgage rates, consumer confidence, LVR restrictions, and a combination of policy changes including the introduction of the bright line test, the removal of interest deductibility on investment properties, CCCFA changes, and the COVID lockdown. Models are always as much art as science, and none should be taken as gospel. Sadly, they can’t magically eliminate the problem of trying to work out causality when lots of stuff is going on at once – as has certainly been the case in recent years! But the analysis is helpful for looking at how the market may evolve from here.

 

May 2023: On the floor, ready to floor it? (PDF 1.70MB)
The RBNZ’s relatively muted response to surging net migration and additional fiscal stimulus in the May MPS surprised us. Ultimately, for a time at least, this implies looser monetary conditions than we have been expecting. This, combined with surging net migration and the confirmed loosening in LVR restrictions from 1 June, has led us to upgrade our house price forecast. We now expect quarterly house price inflation to return to around its historical average pace over the second half of 2023 before sticky inflation (and its implications for the OCR outlook) puts renewed upwards pressure on mortgage rates. Net migration is a huge wild card for the outlook currently. The recent explosive pace alongside slowing construction activity is resulting in a rapidly widening housing deficit, adding pressure to house prices. In short, housing tailwinds now appear to be blowing a little stronger than the headwinds. But we’re not convinced the RBNZ will be able to let that run. We expect the RBNZ will need to tighten monetary conditions later in the year once all has been revealed in the data.

 

April 2023: Nearing the bottom (PDF 1.92MB)
The RBNZ is proposing that loan-to-value restrictions be eased. With inflation still well outside the target band, why would they want to juice the housing market? In our view, this isn’t the right way to think about it. Decisions about macro-prudential tool settings are not made through a monetary policy lens. That said, they’re relevant, and all else equal, any easing of financial conditions presents upside risk to the Official Cash Rate.

 

March 2023: Not a straight line (PDF 2.03MB)
2023 is turning out to be yet another year fated to be ‘interesting’ economically: January brought flooding, February brought cyclone Gabrielle, and March delivered global banking sector wobbles. This month we provide an update on how we’ve factored recent weather events into our outlook (spoiler alert: these are very uncertain), and also discuss the possible ways in which a global financial shock could impact the New Zealand housing market and broader economy. The potential impacts of recent financial market wobbles range from ‘complete game changer’ (ie if they are the beginning some something much larger) to ‘a relatively small blip in the road’. Without convincing information to suggest otherwise, our forecast assumes the latter. However, even if the wheels stay firmly on, global financial market woes could well mean tighter credit conditions for a given level of the OCR, meaning it’s difficult in this environment to focus only on upside inflation risks when discussing risks to our OCR call (for a peak of 5.25%). Market pricing has certainly shifted lower (a loosening in financial conditions all else equal), but that could all change in a number of days.
 

February 2023: Rain check (PDF 1.16MB)
House prices fell less than expected in the month of January, but it’s far too early to say if that’s the beginning of the market finding a floor a little earlier than expected or just a blip. Our outlook implies it’s the latter, as we maintain our outlook for a 22% peak to-trough decline in house prices, which if correct (a big if, to be honest) implies house prices have another 7% or so to fall from here. But cyclone Gabrielle, and to a lesser extent the Auckland flooding in late January, will certainly change the outlook for housing and residential construction in parts of the country, representing an upside risk to both house prices and construction activity. In largely unaffected regions, on the other hand, if the inflationary impacts of the weather events mean interest rates need to go higher, that would be an eventual negative for house prices and activity. That’s actually necessary, to free up resources for the rebuild. At this early stage, we don’t have a good handle on the timing or the magnitude of these impacts. We discuss some of the risks to the housing outlook that these events present, and will endeavour to incorporate more into our outlook as information comes to light.
 

January 2023: Key themes for 2023 (PDF 1.49MB)
In our first edition for 2023, we take a look at the key macroeconomic themes for the year ahead that will matter for the housing market. The economy is clearly softening, and over coming months, the RBNZ Monetary Policy Committee will need to make a call regarding when they have cooled things sufficiently to knock wage-price spiral risks on the head, allowing them to sit back and “watch, worry and wait”. All else equal, the end of rate hikes should quickly be followed by an end to house price declines, but that’s assuming the household sector broadly holds it together and forced house sales don’t pick up meaningfully. The wobbly global economy could always throw us a curve ball; housing policy changes and/or a significant net migration surprise could alter the landscape at the margin too. Forecast uncertainty remains elevated so we’ll need to remain nimble.

November/December 2022: Six reasons (PDF 1.62MB)
We now expect the OCR to peak at 5.75% (previous forecast peak: 5.0%) and that means a higher mortgage rate outlook and more downward pressure on house prices than otherwise. Accordingly, we have downgraded our house price forecast from a decline of 18% (peak to trough) to 22%. The potential shock value associated with the accelerated pace of rate hikes present additional downside risks to the housing outlook that we cannot, with any confidence, incorporate into our forecast. The housing market will find a floor at some point. But there’s a considerable amount of uncertainty around both the magnitude and duration of price declines that will play out before that floor is discovered. This month we look at six reasons to believe downward house price momentum is yet to ease, but also look at six things to keep an eye on as they may signal the eventual floor can’t be too far away. Broadly, all 12 points are consistent with our forecast that we’re just over half way through the house price correction, and that the level of house prices will find their floor around Q3 2023. While upside interest rate risks remain a key downside risk for the housing outlook, household income and housing confidence risks are both intensifying, and would likely pack a bigger wallop if they were to materialise.

 

October 2022: Testing times (PDF 1.19MB)
The economy is so far holding up pretty well in the face of a rapid rise in interest rates over the past year and a double-digit fall in house prices from their peaks. While robustness is hard to label ‘bad news’, it does suggest the RBNZ needs to do more to drive a wedge between supply and demand such that capacity pressures are diminishing meaningfully, reducing inflation pressures. And, unfortunately, for those with a mortgage, the recent CPI data suggest that wedge needs a few more solid whacks from the sledgehammer. For recent first home buyers, and the highly leveraged in general, this is going to hurt. But failure to restore inflation stability would be an even more painful experience. We now expect the RBNZ to deliver two consecutive 75bp hikes, taking the OCR to 5% in February. And if that doesn’t see capacity open up, they’ll keep going until it does.

 

September 2022: Spring bounce or false floor? (PDF 1.97MB)
The housing market continues to evolve in line with our forecast for a 15% peak-to-trough decline in prices, with the August data suggesting we’re about two thirds of the way through that. From a fundamentals perspective, we don’t see any good reasons why the housing market might suddenly turn a corner over the coming months. Mortgage rates are still lifting, housing scarcity has been greatly eroded, and affordability remains dire (albeit a little better). Importantly, if the market does put out any green shoots while the labour market remains too tight and CPI inflation too high, the OCR (and mortgage rates) will very likely need to go higher than otherwise. And for households with a high debt-to-income ratio, that would be particularly bad news. But the RBNZ has to tame inflation, and if tightening isn’t working as quickly as needed, they will do more until they get the balance right. We’ve recently lifted our expectation for how high the OCR will need to go.

 

August 2022: No place for green shoots (PDF 1.39MB)
Why have some fixed mortgage rates fallen lately despite the Official Cash Rate lifting another 50 basis points in August? By providing an overview on how mortgage rates are determined, we hope to answer this very question in this month’s feature. Intended as a beginner’s guide, we gloss over some of the nitty gritty, rather providing a high-level overview of what banks do, where they get their funding from, and key ways in which the cost of that funding can change. In particular, we hone in on how the OCR – and expectations of what the OCR may do in the future – impact floating and fixed mortgage rates. See this month’s Feature Article.

 

July 2022: Hardening headwinds and soft landings (PDF 1.29MB)
The NZ Q2 CPI figures suggest high underlying (“core”) inflation may stick around longer than previously thought. And with the labour market still tightening (from already record-tight levels), the RBNZ has plenty of work to do in order to prevent a damaging wage-price spiral. We’ve added a further 0.5% points to our expectation for how high the OCR will need to go (now 4%), and that means higher mortgage rates – and more downward pressure on house prices – than otherwise. We’ve downgraded our house price forecast to reflect this, with a peak to trough decline of 15% now pencilled in (previously -12%). But forecasting uncertainty remains high.

 

June 2022: When, not if (PDF 1.78MB)
Residential investment is in the firing line as interest rates push higher to combat decades-high inflation, house prices fall, and shortages of both materials and labour continue to add uncertainty in the near term while limiting upside growth potential. In short, the calculus of building has shifted dramatically in the space of a few quarters and the stars are now aligned for an unwind. In fact, some indicators are already pointing sharply south, but it’s difficult to diagnose whether this is more a story about constrained supply or waning demand. We think it’s a mix of both, but come 2023 softer demand will be the dominant driver.

 

May 2022: Better fundamentals mean softer prices (PDF 1.58MB)
Two big events have taken place since our last edition: The RBNZ hiked 50bps on 25 May (as expected), and lifted its forecast for how much higher the OCR will need to go (that was more of a surprise); and the Government released Budget 2022, which included another increase in government spending. We have since tweaked our OCR forecast to be slightly more front loaded. While we continue to expect it to peak at 3.5%, we have also centralised some of the downside risks we are seeing to our (still very uncertain) house price outlook. We now expect house prices to fall 11% in 2022 (previously -10%), with a much soggier recovery thereafter. The latter reflects very solid progress in recent quarters towards addressing NZ’s housing deficit.

 

April 2022: Regional rollercoaster (PDF 5.91MB)
This month we take a look at housing market developments across 14 key regions. While the house price cycle has been broad based, there are some differences between regions when it comes to the magnitude of price gains over the past couple of years. We evaluate regional house prices, indicators of housing market tightness, key regional economy indicators, and regional measures of housing affordability. Where does your region sit? Wherever you live the answer is likely to be “on a cooling trajectory but less affordable than before the pandemic”. See this month’s Feature Article.

 

March 2022: A soft landing as headwinds gather (PDF 1.61MB)
Recent housing data have come in broadly in line with our expectation. Looking forward, our call change for more aggressive OCR hikes and a higher OCR peak have translated into an even softer outlook for housing. We now expect house prices to fall 10% in the year to December (previous: -7%). With CPI inflation intensifying, it’s our forecast that the RBNZ will continue lifting interest rates even as economic momentum (and housing) fade. That’s a dynamic that may surprise some kiwis, but central banks must defend their inflation targets (and credibility) at all costs. It may not take much for our expectation for a relatively soft landing in housing to surprise on the harder side.

 

February 2022: At your service (PDF 1.50MB)
How much will OCR hikes hurt household balance sheets? The answer to this question is a function of three key factors: the degree of interest rate rises, growth in household incomes, and growth in household debt. We put all these together on a path consistent with our broader economic outlook to investigate the likely looming change in household debt burdens. There are certainly tougher times ahead for borrowers, but based on our forecast for a 3% OCR, we don’t yet see flashing red lights. However, our aggregate analysis likely understates debt concentration risks. That is, there are a lot of highly indebted recent first home buyers out there who will feel the pinch of rising rates a lot more than the average mortgage borrower.

 

January 2022: On the house (PDF 1.67MB)
In this feature article we explore whether the moderate house price declines we’re expecting in 2022 will cause wider economic momentum to stumble. Our modelling suggests that household consumption won’t be too badly impacted by moderately declining house prices – especially given that the tight labour market should support household incomes. But there are risks. Falling house prices may cause a more significant decline in the construction industry, or a souring in consumer and business sentiment, and either of these factors could feed through into more serious impacts on the wider economy.

December 2021: Coming back to earth (PDF 1.62MB)
In November, house prices posted the second-lowest monthly increase since the end of lockdown in 2020. And it’s looking like the shine is well and truly coming off the housing market, with weaker sales, tighter LVR restrictions and new consumer lending protections legislation seeing mortgage lending rapidly drying up, even as new listings surged to multi-year highs. As a result, we’ve revised down our house price outlook a touch, and are forecasting house prices will fall around 4% from their current extremely-elevated levels by mid-2022. Usually, falling house prices are correlated with recessions in New Zealand. But with the labour market running so strong, we think domestic demand will get through a period of mildly falling house prices relatively unscathed.

 

November 2021: Risks building (PDF 1.76MB)
The construction industry has definitely been an outperformer in the New Zealand economy over the past 18 months. The sector has been booming, but with interest rates rising and the housing cycle looking like it’s peaking, there’s a risk that we could see a hard landing in the industry, dealing a blow to the rest of the economy along the way. But while there are many challenges facing the industry at present, that’s not our central view. After all, there is a lengthy pipeline of activity for the industry to work through, and a lingering (but improving) supply-demand imbalance. That said, construction tends to be a bit more cyclical than many other industries, so we’ll be keeping a close eye on developments.

 

October 2021: The tide is turning (PDF 1.69MB)
Ongoing lockdown measures in Auckland are adding noise to the housing data, but looking through that, the underlying housing pulse seems to be holding up for now. House price inflation remains elevated, but it is slowing. We’re expecting that slowdown in prices to continue. This month we find ourselves adding another house price headwind to an already-lengthy list: the Government’s housing density legislation, which brings additional downside risks to the price outlook, particularly over the medium term. As summer and the New Year approach, we think it’ll pay to keep a close eye on the listings data and migration settings and outturns. Both could shift the dial for this house price cycle in a meaningful way.

 

September 2021: Rent is due (PDF 2.12MB)
Are significant rent rises imminent? House prices have surged (along with debt); policies that favour first-home buyers may be crowding out rental supply; regulatory costs (and risks) for investors have risen; interest rates are rising and landlords can no longer deduct this cost; and rental yields have fallen to very low levels (possibly weighing on the incentive to build more rental properties – at least from a cash flow perspective). It all sounds a bit like a perfect storm, but there are constraints to rent rises. Chiefly, landlords need to balance these forces against tenants’ ability to pay. But benefits and wages have risen. Fair to say, the solution to rising rent pressures isn’t tighter regulations on landlords, it’s more supply of housing generally.

 

August 2021: Turning point (PDF 1.29MB)
We think the housing market is at (or very close to) a turning point. But we’re cognisant that forecasting house prices can be a lot more art than science, and that economists and government institutions alike have failed art class badly this past year or so. Indicators of market tightness are pointing to some persistence in house price pressures in the near term as very low inventories keep competition fierce. But higher mortgage rates, tax policy changes, tighter credit conditions, affordability constraints, and ongoing (but highly constrained) progress towards lifting supply are significant headwinds, and now we can throw COVID-19 uncertainty into the mix. Believe it or not, house prices can fall. While a material decline is not our central forecast (assumption), from these stratospheric levels that’s certainly a risk.

 

July 2021: Headwinds gathering (PDF 1.62MB)
As 2021 has progressed, it has become increasingly clear that the economy has recovered well and is steaming ahead so quickly that it’s high time for the Reserve Bank (RBNZ) to start unwinding the emergency stimulus delivered in response to the crisis. The RBNZ has already scaled back and then formally ended quantitative easing (“money printing”) and the next logical step is to start lifting the OCR, with the first hike expected next month. While on the one hand that’s an endorsement of the strength of the economic rebound and the lift in confidence (and house prices), it also means borrowers will face higher interest costs in the months and years ahead. This month we discuss what markets are telling us about how high interest rates might go, compare that to past cycles, and discuss some of the factors that will determine how high interest rates can go over coming years.

 

June 2021: A slow ship to turn (PDF 1.72MB)
May housing data suggest recent Government policy announcements are weighing on overall housing activity. Sales fell 11.8% m/m in May (seasonally adjusted). But with listings also sparse, reduced investor demand hasn’t yet been enough to slow the monthly pace of house price inflation. This came as a bit of a surprise and we have upgraded our near-term house price forecasts to include a little more momentum. We have also brought forward our expectation for OCR hikes by six months to February 2022. That means mortgage rates are expected to rise a little sooner than before, taking some of the steam out of the housing cycle a bit earlier.

 

May 2021: Making headway (for now) (PDF 1.54MB)
The closed border means the New Zealand housing market is in the rare position of being able to build enough houses to keep up with new demand. This month we explore a range of supply and demand indicators to gauge the severity of the current housing shortage and how this is likely to evolve in coming years. Overall, we sketch out a picture of a housing market whose fundamentals do not support the kind of sky-high price increases we saw over 2020. But at the same time, the construction industry is running into acute capacity pressures, which are driving up costs spectacularly and delaying the rollout of new housing. On net, it looks like New Zealand will be able to chip away at the housing shortage pretty quickly over 2021. But it’s important to note that this progress is largely due to the border closure; as the largest source of demand for new housing has been completely shut off. This brief respite will not last unless serious changes to immigration policy are made. This month’s Feature Article explores the housing shortage in more depth.

 

April 2021: Policy plethora (PDF 984KB)
Housing policy has moved very fast in recent months, and for good reason – the market has gone bonkers. Affordability and credit constraints mean the recent pace of house price inflation was never going to be sustainable, but now, with the policy headwind about to start biting harder, we think the slowdown is looming. This month we take stock of recent policy changes and discuss some of their expected impacts. House price inflation is expected to slow a little faster than otherwise, and the risk that house prices actually fall is now higher. But while these policies may take the heat out of the market, the impact on rents could be less helpful from a broader housing affordability perspective. Further, most of the recent policy changes won’t help to deliver the additional houses NZ needs to address its structural problem – they buy time. The supply side is where policy now needs to focus.

 

March 2021: Nothing lasts forever (PDF 920KB)
The housing market has had a spectacular run over the past year, fuelled by easy financing conditions, with interest rates low and credit readily available. But this environment is not expected to last forever. Interest rates are expected to rise, albeit gradually, with longer-end interest rates expected to lift first. This is expected to pass through only very slowly to costs faced by borrowers, but eventually, debt-servicing is expected to become more expensive. Meanwhile, abundant bank funding has ensured that credit has been readily available to meet demand, but slowing deposit growth, bank caution and policy changes are expected to see credit conditions become more of a constraint. Eventually, these factors, alongside affordability limits and other headwinds, are expected to see a slowing in the housing market, though the timing is uncertain, and conditions are expected to tighten only gradually. To the extent that some in the market are assuming current very easy financing conditions will continue, expectations may be disappointed, potentially weighing on the market more than we currently expect. 

 

February 2021: Off the beaten track (PDF 1.07MB)
Globally, housing markets have generally beaten expectations through the COVID-19 crisis, in part due to a policy response that has been large and synchronised. But the New Zealand housing market has been an outlier, supported by – and contributing to – our strong economic recovery to date, which has been underpinned by our successful health response and effective fiscal and monetary policy. Relative to history, the recent episode has been different too. Although the current housing upturn shares some similarities with the 2000s, maintaining momentum for such an extended period appears unlikely this time around. While momentum can be self-propelling to some extent, acute housing unaffordability, very high debt levels, macro-prudential policy tightening and credit constraints look set to weigh in time, with a slowing in the rate of housing price inflation expected. However, it may take time for the market to turn and, until that happens, affordability and debt levels could become even more stretched. See Feature Article: Off the beaten track for more.

 

January 2021: On the horizon – Key themes for 2021 (PDF 692KB)
A number of ongoing themes will shape the way forward in the year ahead. The COVID-19 pandemic continues to run rampant globally, and our national fortunes will remain crucially tied to our continued success in keeping the virus out. The path to inoculation will take time, and bumps are possible along the way. Domestically, housing is likely to remain high-profile, with the market ending the year on an unsustainable footing. A degree of cooling seems likely, and credit conditions may become less permissive, though it is also possible that unaffordability continues to worsen, exacerbating longer-term risks. Meanwhile, new challenges look set to come to the fore, like the impact of our lost summer of tourism. Businesses have been remarkably resilient, setting us up well to weather this test. But even so, we need to brace for some impact. Inflation risks have increased too, especially with supply disruptions an ongoing problem, and volatility may return as markets digest the unfolding outlook. For policymakers, trade-offs are becoming trickier to manage and longer-term issues will rear their heads, along with questions about when policy settings might return to “normal”. And of course, we will be faced with unknown unknowns in the time ahead – those inevitable uncertainties that will shape the path forward, for better or worse. See Feature Article: On the horizon – Key themes for 2021 for more.

December 2020: Housing affordability – unlocking the solution (PDF 1.25MB)

Housing unaffordability is an enormous problem in New Zealand, with especially significant consequences for our young and most vulnerable – and trends continue to move in the wrong direction. Making meaningful progress is urgent, and change needs to be bold to reverse the tide. Broadly, we need to release land, build more houses and better align supply and demand settings. Even sustained stabilisation in house prices would require a monumental shift in the market, and would be a vast improvement from the rapid house price inflation we are seeing currently. But it’s not just policy that needs to change – we need to change our expectations too. Policymakers and the public both need to be willing to accept house price stabilisation or even gradual real house price declines. Not only would this help affordability, but a managed supply-induced decline in house prices is a much better outcome than a painful correction, which is a risk under the current market structure. Although policy change can take time, engineering this sort of response in an orderly way is certainly possible, as shown in Canterbury post-earthquakes. See Feature Article: Unlocking the solution for more.

 

November 2020: Bag of tricks (PDF 836KB)

With the OCR near zero, the RBNZ has had to work with a new bag of tricks since the COVID-19 crisis hit. This month we provide a simple explainer of how these tools work and affect the economy. The latest tool to be introduced is the bank Funding for Lending Programme (FLP), which is aimed at lowering interest rates on mortgages and other bank loans. It's hard to know what impact it will have, but it might lower interest rates by another 20-40bps. Looking forward, a test for the economy lies ahead. The outlook for policy is finely balanced though, and developments in the housing market are one of many possible factors that could tip the balance towards erring away from a negative OCR. A negative OCR is a mind-bending idea, and could have some negative consequences, but for most people on the street the implications would be the same as for a regular cut in the OCR. See Feature Article: Bag of tricks for more.

 

October 2020: Riding high (PDF 892KB)

The housing market is riding high, with income support having provided a significant cushion, alongside a boost from lower mortgage rates. The removal of loan to value ratio (LVR) restrictions has added to demand but has not been a significant driver of the market – and yet financial stability risks are increasing. A “frothy” speculative element appears to be emerging, with FOMO (fear of missing out) part of the equation. Buyers are of the view that it is a good time to buy despite being in the midst of an enormous economic downturn, and house prices appear to be moving against the tide of fundamentals from already very elevated levels. That could contribute to a more volatile cycle if a turn in the market comes – particularly if buyers entering the market have high debt to income, making them more vulnerable to income strains. Macro-prudential policy is likely to be increasingly in the spotlight if current trends continue. The fact is, the housing market does undergo downturns from time to time and homeowners need to be able to ride the wave knowing that sometimes it does get choppy. See Feature Article: Riding high for more.

 

September 2020: Lend me a hand (PDF 876KB)

The housing market and new mortgage lending are bright spots in an economy otherwise facing an enormous amount of uncertainty. Low mortgage rates are lending a hand, and monetary policy is expected to provide even more stimulus, with the OCR expected to go negative next year alongside a bank Funding for Lending Programme (FLP). We expect the OCR will be lowered by 50bps to -0.25% in April, and that the FLP will strengthen the pass-through to retail rates. The impact of the combined policies is uncertain, but short-term fixed mortgage rates could dip below 2% next year. Further declines in mortgage rates will help to shore up the housing market, spending and confidence. But that’s set to go up against a range of dampening factors that are likely to become more evident by year end. Because of this, we expect that lower mortgage rates will provide a cushion, but won’t propel the housing market significantly. That said, there are offsetting forces and a ‘muddle through’ is possible. More broadly, risks to the economic outlook are tilted to the downside and it is possible that the OCR moves even lower than we currently expect. See Feature Article: Lend me a hand for more. 

 

August 2020: Locked out (PDF 1.05MB)

The long-term benefits of home ownership are significant, but buying a new home is expensive. Housing affordability has worsened in recent decades; it now costs more to purchase a house and longer to save for a deposit, putting home ownership further out of reach for many. This is true across most New Zealand regions. Recently, lower mortgage rates have made home ownership costs cheaper, benefiting existing homeowners and those who can enter the market. But those who are locked out of the market cannot reap the same benefits, and rising unemployment and income strains are eventually expected to put pressure on the debt-servicing capability of some households. The RBNZ is providing an important cushion to the economy through lower mortgage rates (and other channels), reducing the blow to both house prices and incomes. But it won't solve New Zealand's housing affordability problem; that requires a hard look at structural factors. See Feature Article: Locked out for more. 

 

July 2020: Turn of the tide (PDF 0.98MB)

The COVID-19 crisis has seen trends in the housing market shift. There are offsetting forces, and the crosscurrents are highly uncertain. Currently, the market is supported – but this support may start to wane, particularly later this year. We are wary that a number of factors could weigh in time: a tip in the balance between demand and supply, rising unemployment, caution towards debt, and tighter credit conditions. We see house prices falling 5-10%, but the outlook is highly uncertain. It will hinge on the global COVID-19 situation, economic conditions, migration flows, policy choices, and household attitudes. See Feature Article: Turn of the tide for more. 

 

June 2020: Where the rubber meets the road (PDF 908KB)

The reopening of the New Zealand economy has made the outlook a little bit brighter. Recently, there has been a bounce in spending and positive anecdotes about the housing market - but we do not expect this positivity to last. The period ahead is when people on the street will feel the recession in lasting ways. Unemployment is rising and businesses are cautious. It will be a slow economic recovery, which means mortgage rates will be low for a long time. For some households, this will make home buying and spending more attractive, while for others it presents an opportunity to improve their financial positions. Although low interest rates will cushion the economic blow to some extent, weaker incomes and reduced job security will weigh on the housing market. The shortage of housing will likely erode, particularly in tourist regions. We have nudged up our house price forecasts, but only a little. We see house prices down 12%, which will weigh on household spending, with risks now more balanced. See our heatmap for vulnerability to house price falls by region.

 

May 2020: In question (PDF 1.01MB)

The outlook for the property market has shifted abruptly. This has raised many questions and we could arguably write an ANZ Property Focus on each. This month we give short answers to some of those big questions.

 

April 2020:  Collateral damage (PDF 832KB)

With the country under Level 4 lockdown, the property market is eerily quiet. It's a highly uncertain time. We can't predict exactly what will happen for the property market from here; it will depend crucially on how the COVID-19 outbreak evolves. But at this stage we expect the following: the economic impact will be enormous; property market data will be all over the place in the period ahead; financial pressures will increase with many people in limbo; construction firms and the like will incur significant delay costs; credit is likely to be constrained; reduced income prospects and a fundamental shift in the supply-demand balance will see rents under downward pressure; house prices will fall significantly; and commercial property could be even more affected than residential, given its clear links to business activity. 

 

March 2020: Challenging the status quo (PDF 872KB)

A recession is now underway that may be quite deep. The global and domestic slowdown on the back of the COVID-19 outbreak will see new challenges emerge for the construction industry. Demand will moderate on weaker sentiment and incomes, particularly on the residential side. Projects could be delayed and costs increase, intensifying financial pressures that already exist for some as a result of squeezed profitability, credit constraints and low cash buffers. The lower OCR will ease financial pressure for construction-related firms by lowering debt-servicing costs, although the availability of credit will remain a constraint for some. Firms will need to actively manage risks in the difficult and uncertain period ahead that may be prolonged. 

 

February 2020: Confidence trick (PDF 876KB)

Rising house prices are a mixed blessing. It tends to encourage increased spending in aggregate, with some households benefiting from wealth gains and easing collateral constraints. This boosts GDP, though usually debt as well. But for other households, higher house prices mean home ownership slips further out of reach. And the low interest rates than can be the driver of higher house prices can adversely affect older households, even if they own their own homes - they are typically savers rather than borrowers, so lose when rates fall. Currently, households are feeling pretty good on the back of the strong labour market and better economic news (at least up until recently). However, risks are looming. Deposit growth has not kept pace with strong credit demand, meaning banks' balance sheets are under pressure, and credit availability may become a headwind. And emerging global risks are in the spotlight. We expect economic impacts associated with the tragic COVID-19 outbreak to be sharp but short at this stage. However, a larger impact cannot be ruled out. Such risks could see household optimism slide. But for now, momentum is on the up

 

January 2020: What do you expect? (PDF 920KB)

House prices have rebounded a bit more rapidly than we - or the RBNZ - expected. Monetary policy is working, though rising house prices are most definitely a mixed blessing for the economy. We have upgraded our forecast, with house price inflation now expected to reach 8% y/y, supporting our revised call for the OCR to remain at 1% this year. There is some upside risk to that 8% number - the market is tight and house price expectations have increased - but we think a number of headwinds will keep the market in check. Given the current low interest rate environment, house prices could prove volatile. The RBNZ will be watching financial stability risks closely when setting macro-prudential policy to ensure a growth-positive pick-up in housing does not come with a risky speculative dynamic.