ANALYSIS: The state of New Zealand’s housing market is mildly improving – and the Reserve Bank’s decision today to drop the Official Cash Rate 50 basis points to 3.75% could bring further solace to the sector.
The market turnaround is best seen in the annual number of residential property sales in New Zealand, rising from a low of 59,000 in mid-2023 to close to 71,000 now. Prices have yet to show much improvement overall, with an average gain of about 2.5% since the middle of 2023.
The data tell us that first-home buyers are active in the market, but owner-occupiers are still hesitant. Concerns about employment are likely to be an element in play along with general low confidence in the outlook for the economy.
Start your property search
My monthly Spending Plans Survey, for example, shows a net 10% of people plan to cut their spending in the next three to six months compared with a few months ago when a net 10% of people were planning to spend more.
A more realistic assessment of the economy’s likely performance has occurred, though business surveys still show businesspeople are highly optimistic about what lies ahead. Their reality check may just be starting.
While the absence of owner-occupiers from the market is probably temporary, there is a chance that the so-far low presence of investors could be a characteristic of this cycle. My most recent survey of real estate agents undertaken with support from NZHL showed that a net 48% of agents were seeing more first-home buyers in the market. But only a net 12% were seeing more investors.
Discover more:
- Owning v renting in New Zealand – what’s cheaper?
- Paula Bennett's $10m island finally finds a buyer
- An extra $60 a week could wipe $125,000 off your mortgage
The interesting thing is that while the reading for first-home buyers is down only slightly from December, the reading for investors is a sharp fall from net 36% positivity before Christmas.
Why are investors hesitant to buy? One reason is that few will feel the need to beat price rises. Prices are only just edging upward at a very slow pace. Investors will feel that time is on their side, but they will also feel that holding an investment property while waiting for the tax-free capital gain will cost a lot more than it had done in the past.
Councils (which have the power of monopolies) have sharply increased their prices (rates), insurance premiums have soared, and look set for a further boost following the California fires, and maintenance costs are escalating. These cost rises are occurring at the same time that rents in many locations are falling, and landlords are finding it very difficult to secure a good tenant.
Independent economist Tony Alexander: "The data tell us that first-home buyers are active in the market, but owner-occupiers are still hesitant." Photo / Fiona Goodall
Feedback from real estate agents indicates that one or two investors are starting to bump up against the new debt-to-income rules, which limit total investor debt to seven times their income. The numbers are so far quite small given the lack of house price gains. But there will be restraint on the ability of investors to buy to an increasing degree as this upward leg of the housing cycle progresses through 2025.
One important consideration is of course the cost of borrowing money to finance one’s investment. The Reserve Bank has cut the OCR from 4.25% to 3.75% and brought forward by one year to the end of 2025 its prediction of reaching the end-point for cuts this cycle.
The recent revisions to economic growth data in New Zealand have encouraged the Reserve Bank to accept that there is more spare capacity and therefore less inflationary pressure in the economy than it had previously thought.
Will the earlier achievement of the cyclical low for interest rates spur much extra investment? At the margin, some investors will look to purchase earlier than they had been planning. But the numbers may not be large, and it still seems reasonable to expect only mild growth in average property prices this year and next.
- Tony Alexander is an independent economics commentator. Additional commentary from him can be found at www.tonyalexander.nz
