2022 was an exceptionally difficult year for New Zealand’s housing market. Figures released by the Real Estate Institute of New Zealand show that, after peaking in November 2021, house prices nationwide had recorded a cumulative change of -13.7% by the end of 2022. Property sales remained subdued, with sales in November last year recording a year-on-year change of -36.1%.
As interest rates rise, more buyers are hesitating, directly lengthening the time homes take to sell and substantially increasing the number of properties listed for sale.
So, after the boom of 2020/2021 and the downturn of 2022, where is New Zealand’s housing market heading in 2023? Experts say understanding the house price outlook for 2023 requires examining the following key questions:
1
Interest rate movements will be crucial in 2023
Experts say interest rates will be the key factor determining whether house prices rise or fall this year. In November last year, after the Reserve Bank made a record increase in the Official Cash Rate (OCR), taking it to 4.25%, major commercial banks also raised their mortgage rates. Some fixed-term rates were already approaching or exceeding 7%, while floating rates had risen to around 8%.
This will inevitably have a serious impact on homebuyers’ borrowing capacity, while prompting more property investors to withdraw from the market. Valocity head of valuations James Wilson said interest rate changes would be the biggest driver of buyers’ willingness to transact. The Reserve Bank has made it very clear that rates will rise further this year, substantially suppressing housing demand and keeping buyers cautious and alert.
2
Subdued property sales
The sharp rise in mortgage rates late last year affected property sales. Many buyers are likely to remain hesitant until rates stabilise, keeping transaction volumes subdued.
James Wilson expects sales volumes to remain steady this year, as New Zealand’s recession and rising mortgage rates make a major increase unlikely. He said total sales were likely to hover between 65,000 and 70,000.
3
A buyer’s market will remain the dominant theme
Fewer sales mean properties stay on the market longer, giving buyers more homes to choose from. Ray White chief executive Daniel Coulson said days on market would increase noticeably this year, so sellers would need to choose the most suitable sales method for market conditions.
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Auction clearance rates are undeniably falling, but he believes auctions remain the most effective and fastest way to sell. Although this year’s market will be challenging for sellers, lower prices and more homes for sale mean buyers have more affordable choices. For first-home buyers with the means to purchase, this will be a good opportunity, as they will not have to compete with investors or pay a premium for a home they love.
4
Considering New Zealand’s election outcome
Auckland Property Investors’ Association president Kristin Sutherland said many investors would remain on the sidelines before the election, and this ‘wait-and-see’ approach could continue until after it.
Both National and ACT have said they would restore interest deductibility for rental properties and consider changing a range of other policies Labour introduced to curb property trading by investors. Some have predicted that a National election victory would bring investors back to the market, potentially causing a surge in transactions before Christmas this year. Conversely, a Labour victory could mean the market remains subdued.
Daniel Coulson predicts the housing market will remain quiet before the election. Election years are traditionally slow, as people tend to approach property investment cautiously until they know which party will be elected.
Since the COVID pandemic began, the Government and the Reserve Bank have undeniably introduced several homebuying restrictions to cool the market and contain continued house price rises. These include:
LVR (loan-to-value ratio)
LVR restrictions limit how much banks can lend buyers to purchase property. They were removed in 2020, early in the COVID pandemic, but reinstated in March 2021 and subsequently tightened further. Current settings mean most investors need a 40% deposit, while first-home buyers need around 20%.
The bright-line test
The bright-line test operates similarly to a capital gains tax on property owners. Using the end of March 2021 as the dividing point, it applies to properties sold within 5 years under the earlier rules and within 10 years under the later rules, although some new builds qualify for exemptions.
Rules removing interest deductibility for rental properties
Under the rules removing interest deductibility, mortgage interest on residential properties purchased on or after 27 March 2021 cannot be deducted against rental income for tax purposes from 1 October 2021.
The foreign buyer ban
Before the pandemic, in 2018, the Government also introduced a foreign buyer ban to remove speculative money from the market. This dampened many overseas buyers’ enthusiasm, although approval can still be obtained for some properties.
That raises the question: once inflation is under control, if the Government immediately removes all restrictions, could house prices quickly return to their levels a year ago? Some experts say plainly that the answer is no.
Infometrics chief forecaster and director Gareth Kiernan
Infometrics chief forecaster and director Gareth Kiernan said LVR restrictions may mainly affect first-home buyers constrained by deposit requirements. Without LVR restrictions, these buyers might obtain low-deposit mortgages. At present, they still need deposits of NZ$100,000 or NZ$150,000, a substantial challenge for first-home buyers. If the deposit requirement fell to 5%, they would need much less money upfront. Even so, lending against a 5% deposit remains much riskier for banks than lending against a 20% deposit, so banks would still be cautious.
CoreLogic chief economist Kelvin Davidson likewise said that, while commercial banks did not want to take excessive risks, borrowers would also be very cautious. With interest rates continuing to rise, mortgage applicants would worry about being unable to afford large repayments in future. He believes none of the current market controls will affect the prevailing economic conditions of high interest rates and high inflation.
Meanwhile, Davidson believes the foreign buyer ban has had no impact, because the vast majority of New Zealand homes are traded between New Zealand citizens or residents. The ban mainly affects high-end properties, with very limited impact elsewhere.
James Wilson said introducing DTIs (debt-to-income ratios) could have an impact, and he believes banks will be cautious about their introduction. If implemented, they could push house prices down further. He acknowledged that removing some policies could have localised effects. For example, retaining investors’ ability to deduct interest could encourage some to make another purchase. Even so, given current supply and demand and higher interest rates, it would be unlikely to trigger a buying frenzy driven by fear of missing out (FOMO). There has not been enough time to assess whether the bright-line test will have a widespread impact. However, Wilson noted that New Zealand was not a country teeming with property speculators, so the test did not apply to most people. On the removal of rental interest deductibility, Kiernan said repealing these rules could weaken demand for new homes in the short term and could also lead to a substantial fall in residential construction activity.
Taken together, this suggests that removing the many restrictions currently in place would not necessarily have a fundamental impact on the housing market. Conversely, a National victory in this year’s election could well encourage more investors to return to the property market. Do you share this view? Leave us a message in the comments at the end of the article.