1. Few parts of the country have been spared house price falls
A quick look at property value changes at a suburb level over the last 12 months highlights just how widespread the downturn has become. Of the 923 suburbs/towns analysed by CoreLogic NZ, 812 (that’s 88%) have seen a year on year decline in their median value. The biggest declines – greater than $300,000 - were in some of the country’s wealthiest neighbourhoods, such as St Marys Bay and Westmere, in Auckland, and Seatoun in Wellington, but property values in other less expensive suburbs have also been hit hard, with 324 suburbs dropping by at least $100,000 in the past 12 months.
To be fair, it’s probably only a real financial issue if the owner bought at the peak of the market and is now actually having to sell. But large falls in property values will be psychologically troubling for other homeowners, and many existing borrowers have yet to see their mortgage repayments peak (given that they haven’t yet repriced fully to current mortgage rates). On the flipside, aspiring first home buyers will be enjoying the falls.
2. Signs of first home buyer fatigue?
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That said, the latest CoreLogic Buyer Classification figures actually show that the % share of property purchases going to first home buyers (FHBs) has dipped in the past two months, from 25.6% in December to 25.1% in January and 23.6% in February. Now, that’s still a relatively good result for FHBs, given that their average share of purchases since 2005 has been around 21%-22%. And of course, some would-be buyers might have consciously chosen to pull back from the market in the hope that prices keep falling and they can get an even better deal later. But the recent slide is still worth keeping an eye on, and may just hint that higher mortgage rates are finally starting to cause some FHB fatigue (especially since the number of purchases is also low).
3. Are we already in recession?
Stats NZ reported last week that GDP fell by 0.6% in the final quarter of 2022, with the falls spread across many sectors of the economy. Given that Q1 this year has had clear disruptions (e.g. flooding), there seems a pretty good chance that GDP will still be dropping now, meaning that we actually be in a recession already.
But there’s a couple of more encouraging points I’d make. First, the post-floods rebuild will actually stimulate GDP in the next few quarters, meaning that the recession could be short-lived and actually just “pulled forward” from the downturn that had previously been expected later in 2023.
And second, the latest figures mean that the economy is essentially smaller than the Reserve Bank had previously been anticipating, or in other words there’s an implication here of less pressure on capacity than previously thought – and hence less inflationary momentum. Indeed, once again the next monetary policy decision from the RBNZ on April 5 will be intriguing. Uncertainty is high, but it wouldn’t be a total surprise if the bank raised the cash rate by 0.25 percentage points, and maybe even signalled that this could be the last increase in the cycle (leaving the cash rate at a peak of 5%).
In turn, that could start to see a bit of downwards pressure on mortgage rates, given that banks had previously been expecting a peak of 5.5%. To be fair, I wouldn’t expect rates to collapse. But any small falls would be welcomed by borrowers!
CoreLogic chief economist Kelvin Davidson: "The slide is may just hint that higher mortgage rates are finally starting to cause some fatigue." Photo / Peter Meecham
4. Rents have slowed, but new migrants will be on the hunt for a place
Stats NZ’s latest data showed that rental growth (measured by new bonds lodged) eased from an annual pace of 2.8% in January to 2.1% in February. Given that the level of rents now looks to be back in line with where it should be, given the long-run trend (after a period where rents had got above trend), a reasonable central scenario is that growth runs at a typical pace of around 3% in the near to medium term. But the recent surge in net migration – a turnaround from a population loss of 17,521 in the year to January 2022 to a gain of 33,157 in the latest 12 months – may lead to greater pressures. After all, new migrants will probably tend to rent first before looking to buy a property.
5. February would have been a quiet month for new mortgages
Late this week (3pm Friday), the Reserve Bank will publish February’s mortgage lending figures, covering new loans, top-ups, and bank switches. Given we already know that property sales volumes remained sluggish in February – at multi decade lows for that month of the year – the mortgage stats will inevitably be soft too. My focus will be on the breakdowns by loan to value ratio and by interest-only (I-O) vs principle repayment. Lately, I-O lending has been ‘controlled’, and low deposit loans have been hard to come by too.
- Kelvin Davidson is chief economist at property insights firm CoreLogic
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