New Zealand’s house price boom cools down as the exchange rate rises

Anne Bate feels “crazy” trying to downsize in the midst of a global pandemic. But selling a home in the paradise of the fishing village of Pahi in New Zealand’s north-west North Island has proven an easy part.

It was in Timaru, her destination about 1,360 kilometers away on the South Island, that Bate experienced the other side of the market. “It was like a quick and deadly death,” she said. Even as a cash buyer, she says it’s a “miracle” that she finds a place and gets closer to her grandchildren.

New Zealand is facing one of the biggest asset booms in the world. According to Sense Partners, an economic consulting firm, the average house price has increased by 43 percent in the past two years.

That has made buying a home out of reach for many Kiwis. With median house prices now 10 times median annual income, governments and central banks have struggled to find a way to cool down the market without causing a crash.

The country is a prime example of what happened to the housing market during the pandemic. Prices have increased from Canada to Australia since the first quarter of 2020, when policymakers introduced a fiscal and monetary stimulus. Meanwhile, wage growth was more modest.

The house price-to-income ratio line chart shows that New Zealand has become one of the most affordable housing markets

Now, with inflation taking hold globally, buyers and sellers are waiting to see what the removal of central bank and government stimulus measures as well as a series of rate hikes will look like. any. What to do with the housing market?and the broader economy.

The Reserve Bank of New Zealand began tightening monetary policy last October, after 18 months in which its benchmark cash rate was just 0.25%. The rate has since been ramped up to 2% and is expected to hit 4% within a year as the bank tries to drive inflation – currently near 7% – out of the system.

“To some extent, New Zealand is a canary in the coal mine,” said Kelvin Davidson, chief property economist at CoreLogic in Wellington. “It’s a test case for a central bank pushing interest rates when house prices are skyrocketing in response to inflation.”

Its capacity to keep Covid-19 under control for much of the pandemic has resulted in fewer recessions in New Zealand than in other economies. Relatively strong growth – and a shift in monetary policymakers’ mandate to deal with any risks posed by house prices to financial stability – means the bank Central banks are among the first to act when there are signs the growing economy is overheating.

Line chart showing New Zealand's central bank response to high inflation

The impact of these increases, coupled with tighter lending conditions such as a shrinking of high-risk mortgages with high loan-to-value ratios, is being felt in the housing market.

Real estate agents Barfoot & Thompson expect sales volume to drop to about 60% from levels seen last year. Ben Udy, of Capital Economics, said: “New Zealand house prices are falling and all signs point to further decline in the coming months. He now expects a peak-to-trough drop in home prices to reach 20%, double his previous prediction.

But even a 20% drop would only bring home prices back to 2020 levels. The real risk to the New Zealand economy is that households cut spending dramatically to protect the wealth that boom. housing explosion and low rates have created.

Shamubeel Eaqub, an economist with Wellington-based Sense Partners, has calculated that residential wealth has increased by NZD460 billion, or $295 billion, during the pandemic. New Zealand’s gross domestic product in 2021 is NZ$350 billion.

Udy said New Zealand is a prime example of an economy where “consumers are more sensitive to house prices than elsewhere”.

With central banks currently raising interest rates globally – and expected to tighten further in the coming months – a big question is whether other markets will follow in New Zealand’s footsteps.

Real estate agents remain upbeat. “While the market will slow down, I don’t think we’ll see a drop in prices globally. Kate Everett-Allen, partner and head of international population research at Knight Frank, says the rate of price growth will slow and slow down over the next few months.

Economists are more skeptical. Innes McFee, chief global economist at Oxford Economics, has seen a period of “very weak price growth” coming, as higher rates drive up mortgage costs. Vicky Redwood, senior economic adviser at Capital Economics, thinks prices will fall in the UK, Australia, Canada, Sweden and Norway, along with New Zealand.

Some New Zealanders see a layer of silver lining from the bursting of the housing bubble that has left many struggling to climb the property ladder. Home ownership is at its lowest level since the 1950s, according to Eaqub. He noted that around 4% of New Zealand’s tax revenue is spent on housing support.

Tobias Otting, a 29-year-old consultant with CoreLogic who was looking to buy a home in Wellington with his partner, has seen a head-to-head confrontation between sellers trying to keep prices steady and buyers looking to find a way. pricing in the impending price drop. “The reality is starting,” says Otting. It’s a buyer’s market. “We have the luxury of being patient.”

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