Signs of easing in housing market activity

The latest Real Estate Institute of New Zealand (REINZ) figures showed an easing in housing market activity over December and January. The decline in house sales was broad-based across the regions, with softer demand weighing on house prices. The easing in housing demand was also reflected in the pick-up in the median number of days taken to sell a house, as well as the decline in the proportion of houses sold at auctions.

To put the recent developments in context, the weakening in the housing market follows a surge in housing demand since mid-2020, as the unprecedented amount of stimulus injected into the New Zealand economy by the Government and the Reserve Bank boosted demand. In particular, the sharp drop in mortgage rates and temporary removal of Loan to Value Ratio (LVR) restrictions drove increased demand for borrowing. Despite the easing in the housing market over December and January, the REINZ House Price Index still show an increase of 19.9% in prices nationwide from a year ago, and this largely reflects the surge in house prices over much of 2021.

Higher mortgage rates and new credit rules present headwinds

Conversely, higher mortgage rates are now dampening demand for housing. In particular, one-year fixed term mortgage rates increased from a low of 2.21% in June 2021 to 3.57% in January 2022. With 60% of mortgages not due for repricing for at least another six months, the broader impact of higher mortgage rates on the New Zealand economy will become more apparent later this year. Besides the impact of higher mortgage rates on housing demand, households repricing their fixed term mortgages onto higher rates will rein in other spending in the face of higher mortgage repayments.

The introduction from December 2021 of changes to the Credit Contracts and Consumer Finance Act (CCCFA) requiring greater scrutiny by banks of borrowers’ serviceability of debt has also reduced the number of mortgage approvals. While an enquiry into any unintended impact of the recent changes may lead to amendments to the CCCFA, for now, the tighter access to credit is reducing borrowing for housing.

New housing supply will also take the heat out of the housing market

Over the longer term, as new housing supply comes onto the market, this will also reduce house price pressures. Dwelling consent issuance increased to a new record high of almost 49,000 dwellings for the year to December 2021, driven by strong demand for the construction of medium-density housing. International border restrictions to contain the COVID-19 outbreak in New Zealand have slowed population growth, and along with the new housing supply, this should take the heat out of the housing market over the coming years.

But housing market resilient in the face of a solid labour market

How much the housing market will continue to weaken will depend largely on how much mortgage rates will increase over the coming year. Intense inflation pressures have led markets to expect OCR increases from the RBNZ of over 1 percentage points over the coming year. While higher mortgage repayments will crimp discretionary spending and reduce housing demand, we expect the favourable labour market outcomes will support household incomes and reduce the likelihood of a sharp correction in the housing market.

^{1. https://www.rbnz.govt.nz/statistics/b21-new-residential-mortgage-special-interest-rates}