New Zealand house prices have experienced their biggest quarterly drop in a decade, raising some hopes of a cooling market for those who have long been locked out by sky-high property prices. But the same forces that are pushing prices down – inflation, high cost of living, and rising interest rates – are also hitting prospective buyers, especially those at the bottom end of the market.
After years of rocketing prices, price data from across the country is now observing some of the largest drops and slowdowns since the aftermath of the global financial crisis. Valuation company QV found the average home decreased in value by -0.6% nationally in the first quarter of the year, with the national average value now sitting at $1,046,636. The decrease, while small, comes after years of steeply rising prices, and ANZ economists say the mood among buyers has shifted dramatically – from “fear of missing out” to “I’m not paying that”.
“With the massive rise in listings over the past couple of months the balance of power has shifted firmly into the hands of buyers, after such a prolonged period of it being a sellers’ market,” QV General Manager David Nagel said.
ANZ economists are now projecting a 10% drop in prices over the year. While that would be easily the biggest drop in prices in the last decade, it is still far from returning New Zealand house prices to what they were even a couple of years ago – median house prices rose 31% in the year to July 2021. The biggest drops are in the country’s main centres, which Nagel said were “currently taking the brunt of the impact of rising interest rates, high living costs, and tightening bank credit.” The Real Estate Institute reported in February that median house prices in Auckland had fallen by nearly 20% since their peak in November, from $1.54mn in November to $1.25m in February.
At first glance, those shifts are good news for prospective homeowners – housing affordability has long been considered a crisis in New Zealand, where houses in the largest cities cost several times the average annual income. But rising interest rates, higher cost of living and tougher lending rules – the same forces that are pushing prices down – are also keenly felt by first homebuyers, especially those on lower incomes.
In 2021, coming off years of rises, many prospective buyers were desperate simply to get into the market, in case it continued to rise and the bottom rung of the ladder rose out of their reach. “There were a lot of people who had this fear of missing out … a lot of people were really trying to get in, to stretch and to make it work,” says Gemma Rasmussen of Consumer NZ, an independent non-profit that surveys consumer sentiment. Now, with banks forecasting rising interest rates and dropping prices, buyers are newly concerned about stretching beyond their means. “We’re now at a point where people have the fear of paying too much money,” Rasmussen says. “There’s a fear around interest rates going up and that starts making people a lot more cagey around purchasing. Compare that sentiment [with] three or four months ago – it was completely different.”
Consumer NZ surveying found just 16% of New Zealanders thought it was a “good time to buy” in February 2022, down from 25% in October 2021. Conversely, 58% thought it was a bad time to buy, up 8 percentage points. New Zealanders were increasingly concerned that a house might not hold its value – an increasing portion believed homes would drop in value over the next year, and fewer thought it would increase. 83% overall thought the housing market was still either “overinflated” or “out of control”.
A mixture of factors are driving the growing hesitancy for buyers. Some of the change is being aided by a slate of government reforms in 2021, that aimed to cool the market. Those included tougher lending rules for banks, which saw many mortgage applicants turned down for too much “discretionary spending”, and phasing out mortgage interest as a tax-deductible cost. New Zealand is also experiencing record-high inflation, and increasing anxiety over the cost of living. High inflation rates mean the banks are projecting further rises in mortgage interest rates – which could push owners who are already struggling to cover mortgage payments over the edge.
“For the people who have overextended, there could be a degree of nervousness for them about now sitting with a really high mortgage and having these high cost of living costs, also knowing that they may not be able to go on and make the sale,” Rasmussen said.
“Six months ago, the primary concerns for the nation, [were] around Covid-19, and in particular concern about an overinflated housing market. Now the top concern for New Zealanders is around just purely the financial cost of living. People are really finding that to be a massive strain.”
