1. Reserve Bank concerned but not panicking
Last week’s six-monthly Financial Stability Report from the Reserve Bank of New Zealand (RBNZ) had a key emphasis on the housing market, rightly pointing out that continued property value falls and sharply rising mortgage rates/repayments are clear risks to keep a close eye on. Overall, though, they also reiterated something that’s been prominent in our commentary for a while now – that for as long as unemployment stays low, the housing downturn should be “manageable”.
As expected, the RBNZ also noted that the loan to value ratio (LVR) rules are appropriate for now, while at the same time the design of a system for caps on debt to income (DTI) ratios for new lending remains in progress. Reading between the lines, the chances seem to be growing that DTI caps could be imposed late next year, but LVR rules loosened at the same time. This would make things easier for first-home buyers, but tougher for investors (as they use high DTI loans more often).
2. Unemployment remains very low
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With the Financial Stability Report emphasizing how the labour market holds a big key in terms of NZ’s economic and housing outlook over the next few years, it was good to see that the unemployment rate stayed flat at 3.3% in Q3, with wage growth also strong. Of course, in this new post-Covid world sometimes good news can actually be bad (at least for mortgage holders) – low unemployment certainly raises the chances that the Reserve Bank pushes up the official cash rate by 0.75 percentage points on November 23, keeping a degree of upwards pressure on mortgage rates.
3. Property values still declining
The latest CoreLogic House Price Index showed that average property values – measured across all stock (regardless of recently sold or not) – dropped by 1.3% in October, moving the annual growth rate into negative territory (-0.6%) for the first time since July 2011. Apart from Christchurch, each of the main centres currently has property values lower than where they were a year ago, especially wider Wellington (City, Lower and Upper Hutt, Porirua), at -13.1%. Moreover, with interest rates rising, there are still plenty of challenges ahead for the property market – especially since higher rates also encourage would-be investors to park their money in a term deposit rather than buy a house.
CoreLogic chief economist Kelvin Davidson: “As long as unemployment stays low, the housing downturn should be ‘manageable’.” Photo / Peter Meecham
4. Dwelling consents still defying gravity
Meanwhile, the latest Stats NZ figures showed that new dwelling consents in September were about 2% higher than the same month last year, with the annual rolling total remaining above 50,000. The continued strength is being driven by smaller dwellings – namely townhouses, and in areas such as Auckland and Christchurch. Obviously, the more dwellings the better in terms of starting to improve housing affordability, but a slowdown for new consents still remains on the cards in 2023.
5. Investors closely watching rents
Having already been knocked from several different angles in recent years (e.g. changes to tenancy laws, extended bright-line, removal of interest deductibility, rental loss ring-fencing), another challenge now for landlords – but of course great for tenants – is a slowdown in market rents. This Friday will see Stats NZ publish the October rent price figures and although September’s 1.3% drop in rents (compared to the same month in 2021) wasn’t representative (because it compared back to a temporary upwards blip a year earlier), it’s still the case that the rental market is easing. My rough stab is that rents in October will have been in the vicinity of 2-3% higher than a year ago – a sharp slowdown from typical growth of 5-6% earlier in 2022.
- Kelvin Davidson is chief economist at property insights firm CoreLogic
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