Why 4.6% is the housing market’s magic number - for horrible reasons

1. Home values now down 2.5% from February

The nationwide median value dropped another 0.5% in July, taking the fall since February’s “mini peak” to 2.5%. The fall from the post-Covid peak two and a half years ago is 16%, although property values remain 19% above pre-Covid levels. There were falls in values in each of the main centres in July, although some glimpses of more resilience in provincial markets.

The recent sluggishness for property sales activity and home values is hardly surprising when you consider the elevated levels of listings on the market and the reduction in job security that people are feeling (not to mention actual job cuts in some sectors). Of course, all eyes over the next few months are on inflation, the Reserve Bank, the Official Cash Rate and mortgage rates.

2. Filled jobs have started to fall

Speaking of employment, last week’s filled jobs figures from Stats NZ showed a 0.1% monthly decline in June, following drops of 0.2% and 0.3% in April and May respectively. So it’s fair to say that we’re now firmly into a weaker phase for the labour market, with the falls since March totalling up to around 14,000 fewer jobs. Clearly, in the wider context of 2.38 million jobs that are still filled, those cuts are relatively small – but that’s still a big impact on those affected households, and there’s probably more to come. This is a strong reason to be cautious about property’s near-term prospects.

3. 4.6% is the magic number

Coming hot on the heels of those filled jobs figures, this Wednesday Stats NZ will publish the official labour market stats for Q2 – not part of the Reserve Bank’s policy mandate anymore, but still an important piece of the wider puzzle. The RBNZ anticipates the unemployment rate will rise from 4.3% in Q1 to 4.6% in Q2, so if we got that number or worse (especially if it reflected actual job losses rather than a larger labour force), expect the commentary about a looming Official Cash Rate cut to get stronger.

That said, some context is also important. The unemployment rate might only peak in the range of 5-5.5% in the second half of next year, which is still quite low by past standards. In other words, a crash in employment doesn’t seem likely, so a big renewed slump in house sales and prices isn’t really on the cards either.

CoreLogic chief economist Kelvin Davidson: "The recent sluggishness for property sales activity and home values is hardly surprising." Photo / Peter Meecham

4. Non-performing loans are ‘under control’

In the current environment where mortgage rates remain high (for now) and the labour market is weakening, clearly there’ll be a lot of focus on measures of debt repayment stress. On a positive note, for now, these indicators haven’t shifted too dramatically. The latest RBNZ figures show that about 0.5% of loans on bank books are non-performing (either late on repayments or already impaired), which is up from 0.4% a year ago and 0.2% two years ago – but still low.

5. Dwelling consents continue to fall

Finally for this week, Stats NZ reported that new dwelling consents in June were 36% lower than the same month last year, the 20th drop in the past 21 months, with the annual running total now sitting at around 33,600 – compared to May 2022’s peak of 51,000. To be fair, that peak was a record high and arguably beyond the industry’s capacity to actually build the houses anyway. But there are now plenty of reports of builders with time on their hands, so further falls in dwelling consents (which seem likely) will only add to those concerns down the track. However, with interest rates now set to drift lower, there’s a reasonable chance that 2025 could see a turnaround for building activity.

- Kelvin Davidson is chief economist at property insights firm CoreLogic