The Auckland market was very slow in the first half of 2023, and the January flood events certainly didn’t help. Over the past few months though there has been a slow recovery in both sales numbers and prices. Much of this has been driven by first home buyers, particularly in the new housing sector where they are very prominent. There has been a general acceptance of lower prices by vendors, and the market is now better balanced with supply and demand of housing.
The New Zealand economy fell into a short recession in the first quarter of 2023, but has pulled itself out of this in the latest quarter with 0.9% growth in GDP. Underlying economic momentum still looks quite fragile as Consumer Price Index (CPI) inflation remains high. This will mean no let-up in mortgage rates for now, as it will require the Reserve Bank to keep the Official Cash Rate (OCR) higher for longer, particularly if the housing market continues to gather steam.
The recent strength in the economy has been supported by a number of factors including:
- The migration boom underway with a significant increase in migrant numbers.
- Good job security with low unemployment of 3.6%, rising job numbers and wage growth.
- Tourist numbers are rising strongly post pandemic, providing a welcome boost to the economy and regions, and the hospitality sector is recovering strongly after the severe pandemic shock.
- Foreign students are returning which is helping the Auckland CBD.
- The trough in the housing market appears to have passed as prices and sales activity are now slowly rising.
- Government spending has been high and further significant investment in the country’s infrastructure is necessary which will boost the economy.
In response to the stronger economic activity, the property market has now moved into a subdued recovery. Sales volumes are slowly increasing (albeit off a very low base), and the house price cycle has clearly turned, with prices trending upwards over the past few months. Days to sell have also fallen, indicating some life returning to the market.
Underpinning recent momentum, first home buyers have re-entered the market after a long absence and are making up a larger share of new sales. Investors have been largely sidelined due to the low yields on offer, lack of capital gain, high mortgage interest rates and 35% deposit requirements. But as rents continue to rise quite strongly and potential changes to tax rules making property investment more attractive, investors are expected to reemerge as a buying force.
The construction sector is also still in reasonable heart. Building Consents have come off their high levels as house prices have dropped, but there is a lengthy tail to the construction boom as historical consents are completed. Supply issues and product shortages coupled with soaring building costs have become embedded into construction and are adding further pain to the building sector. It may be some time before there is any meaningful rise in construction in response to the slowly rising prices and turnover.
However, there are a number of factors creating uncertainty, not least of which is the stubbornly high inflation rate of 5.6%. While it is slowly coming down, it is a very slow decline and remains well above historic levels and the Reserve Bank target band of 0% to 3%. The resulting high cost of living is now baked into the economy. This is impacting on households and, coupled with the higher interest rate environment and increased borrowing costs, households are being squeezed by the high inflation and cost of living shock.
A key issue impacting the market is the tight credit environment. Mortgage rates are significantly up, loan to value ratios (LVR’s) are tight and the CCCFA rules have made lending difficult, though some relaxing of these rules is helping the first home buyer market. There is a large refinance profile of borrowers refixing shorter term loans at much higher interest rates who will see their mortgage debt servicing rise considerably as a result.
These interest rate changes are in response to the lift in the OCR. The Reserve Bank has aggressively raised the OCR from its historic low of 0.25%, set during the Covid-19 pandemic and lockdowns, to now sit at 5.5%. The Reserve Bank has signalled that the OCR has now peaked and anticipates cuts from the third quarter of 2024, however this remains to be seen and many economists predict further rises may be required to temper stubbornly high inflation and a now rising property market. Whatever transpires, rates are set to be high for an extended period.
Additional concerns weighing on market sentiment include the falls in export commodity prices impacting the rural market, the recent election outcome and climate change. Various risks internationally include the Ukraine war which has pushed up energy and food prices around the world. Supply chains worldwide have been disrupted and problems have been exacerbated by a slowdown in the Chinese economy. This has resulted in rising prices for materials and goods. Worldwide equity markets have been quite volatile on the back of these concerns, inflationary pressures, and recessionary worries. Expectations for high global interest rates may flow through to still higher interest rates in New Zealand.
The flood and cyclone events felt in the North Island have added another layer of issues for households and the property market to grapple with and will require a long and costly recovery. There will be considerable ongoing disruption and the reconstruction is expected to take many years. This may cause further inflationary pressures to an already stretched construction industry. There is uncertainty around what impact the flood events may have had on the market in general and individual properties that might have actually been flooded.
There remains considerable uncertainty around the speed with which inflationary pressures will decline and as a result relief for borrowers from higher interest rates may take a long time to materialise. The economic outlook is quite variable and there are any number of potential headwinds to the property market. Affordability is stretched and well above the long term average while there is the prospect of Debt to Income Ratios (DTI’s) being introduced in 2024 which could act as a handbrake to future growth. The mid-term outlook for the market could therefore be a lot weaker than expected.
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