House prices suffered their steepest drop on record last year, but experts are unsure as to whether the downturn will make homes more affordable in 2023, citing rising interest rates and a cost of living squeeze.
Figures released by the Real Estate Institute of New Zealand this week showed the nationwide median house price last month was down 12.2% year-on-year to $790,000, with Auckland's median sale price plunging 18% to $1.05 million over the same period.
Most economists have forecast further house price declines this year, with ANZ predicting a nationwide peak-to-trough fall in property prices of 18%.
Falling house prices will lower the amount first-home buyers have to save for a deposit, the biggest affordability hurdle during the recent boom, but rising interest rates means the biggest hurdle buyers now face is mortgage serviceability.
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In the 12 months to the end of December 2022, the Reserve Bank raised the official cash rate from 1% to 4.25%, and has signalled that the rate could hit a peak of 5.5% this year, adding that a recession may be necessary to bring down inflation, which is currently running at 7.2%.
CoreLogic chief economist Kelvin Davidson says that higher mortgage rates are likely to cause a strain, but the path to homeownership may be less hard for first-time buyers.
“In really simple terms, I think we're probably looking at an improvement in affordability this year, continuing improvement next year, but maybe not quite as much because of house prices sneaking back up again,” he says.
Interest rates, incomes and house prices all have an impact on affordability. “It's the balance of where they all sit that [defines] affordability," he says. “I think over the next year, getting the crystal ball out, what we'll see is interest rates flatten, house prices continue to fall, and incomes rise.” If that pans out, affordability will improve, he says.
“But [affordability] is starting from a pretty poor position and it's not going to fix itself just in 2023,” he adds. “We might see it in 2024.”
In that scenario, mortgage rates would need to fall and incomes rise, says Davidson. “Even when house prices potentially start to rise again next year, you can still see housing affordability improve a little bit on these measures if mortgage rates are falling, and incomes are rising," he says.
CoreLogic chief economist Kelvin Davidson says affordability was already starting from a pretty poor position. Photo / Peter Meecham
“What we need in the meantime is continuing supply [of new-builds]. There’s good news on that front [although] dwelling consents are now showing signs of a peak.”
BNZ chief economist Mike Jones also predicted improving affordability for 2023, in his end-of-year housing debrief. “The faster-than-expected house price correction is giving rise to chatter about improving, or ‘less bad’, housing affordability,” says Jones. The fact the fall of house prices and rise in mortgage rates are moving at different rates and in different directions muddies the waters, says Jones. He anticipates that affordability will have improved back to pre-Covid levels around the end of 2023.
David Dyason, senior lecturer in property studies at Lincoln University, says increases in interest rates puts pressure on existing homeowners to service their debt at their chosen price point. Those looking to buy may consider different options when affordability is strained.
“As debt servicing becomes more expensive, prospective homeowners look at their options to purchase, and this is where higher density, townhouses and duplexes, mostly located closer to work and shops and schools ... due to the increasing cost of servicing the debt and the more affordable price point to enter the market and locational benefits.”
Although house prices are falling, buyers tend to still want to spend the maximum they can borrow, says Jarrod Kirkland, national manager mortgages at Mortgage Lab. That means they’re paying more, whatever the affordability statistics say. “People will try to buy as expensive a house as possible. So they're getting more house for their money [as house prices fall]. Clients think they're getting a bargain. So they're tempted to push themselves more.”
Kirkland crunched the numbers on a $750,000 loan. A year ago, homeowners on a two-year fixed rate of 4.2% were paying $845 per week. But a two-year fixed rate of 6.5% pushes the weekly repayment to $1093.
“When we’re sitting down with buyers I’m very quick to say to a client, ‘That’s great. You can borrow a million dollars’, but then I’ll say, ‘What if you have a baby or one person loses a job?’ You’ve got to factor in all that stuff.”
Some will still want to spend up to the maximum on a 30-year term. Others listen and take it in, he says.
While houses are becoming more affordable, the banks are now testing borrowers’ ability to pay between 8.15% and 8.5%, which means they are not necessarily lending the amount home buyers think they can afford to pay at current interest rates, says Kirkland.
“So it's harder from that point of view. But what the banks have done is relaxed some of the criteria with relation to expenses.” For example, they’re now more comfortable at factoring in boarder income into their serviceability calculations than they were a year ago. The rules were a lot stricter in the period immediately after the Credit Contracts and Consumer Finance Act [CCCFA] was updated in December 2021. Kirkland cites one bank where previously a buyer with a 20% deposit could factor in income from one boarder at $150, and now it’s two boarders at $240 each.
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