Leaving last year's stumbling housing market behind
As interest rates ease and job losses climb, New Zealand’s housing market faces a mixed year of modest growth, with conflicting forces shaping the outlook for homebuyers and investors.
Friday, January 17th 2025, 6:00AM
by Sally Lindsay
Leaving a stumbling market behind
This year’s housing market is going to be one feeding off interest rate falls and job losses continuing to climb.
While housing prices are still declining, dropping 0.2% in December – the ninth decrease in the past 10 months – to sit at a national median value of $803,624, economists expect house prices to rise this year, although CoreLogic expects it to be a one- to two-year grind to find equilibrium as conflicting forces play against each other
CoreLogic’s hedonic Home Value Index (HVI) shows December’s national median value is 3.9% lower than a year ago and equivalent to a drop of about $32,200.
Values are 17.6% below the post-Covid peak, although 16.2% higher than the pre-Covid level of March 2020.
If nothing unexpected happens during the year, the average forecast for house prices is 7.1% off the back of lower mortgage interest rates and improving debt serviceability.
Of the big four Australia-owned banks, Westpac is expecting a hike of 8.2% in prices this year and 5.1% in 2026, ANZ is plumping for a 6% increase this year and 7.7% in the year to March 2026, ASB is predicting a hefty 10.9% rise this year and 12.4% in the year to March 2026, while the BNZ is indicating a 6.5% hike.
Of the smaller banks, Kiwibank has tipped a 6% rise, while economic forecaster Infometrics is predicting a 5.2% hike this year and 2.3% rise next year.
The RBNZ, the chief arbiter of New Zealand’s economy, sees house price growth of 7.06% for the year to December. After this the central bank says house price growth will peak at 7.4% in March next year before gradually declining.
Boom warning
One of the main boosters of house prices is usually interest rates. Right now, they’re high in relative terms, but they’re expected to steadily decline this year, which should add upward pressure to house prices.
The RBNZ’s next OCR review is 18 February and it is expected to slash the official cash rate by another 0.5% and possibly 0.75%.
However, independent economist Tony Alexander is warning this year will not bring the boom people seem to be expecting simply because the Reserve Bank (RBNZ) is taking its foot off the interest rates brake.
He says while the RBNZ and Treasury say it will be a better year for the economy there are factors that will dampen the strength of the positives – sluggishness in the country’s biggest export destination of China; fresh deterioration in the government’s fiscal accounts; rising electricity prices and council rates; a drop in in multi-unit dwelling construction through this year and next; stalling tourism growth; and continuing closures of businesses.
While Alexander expects property sales to rise in a controlled manner with prices doing the same thing because of falling interest rates till the middle of the year, he says after that the absence of those falls will eventually occupy people’s minds.
“This will have the interesting effect of constraining the feeding on itself (fear of missing out) tendency of housing market price rises in the late part of this year.”
He says 2023-2025 has been the story of removing monetary policy restraint and 2025-2026 is likely to be the story of imposing monetary policy stimulus.
Tempering expectations.
“In this environment, once borrowers start to see rates with a four in front of them, they’re getting a pretty good deal.”
Squirrel Mortgages is predicting interest rates to fall back and settle somewhere between 4.5-5% as early as March/April this year.
Squirrel founder John Bolton says it is important for borrowers to temper their expectations around what a “good” rate looks like, because they are unlikely to get back to the same low rates of under 3%, in some cases, during Covid any time soon.
“In this environment, once borrowers start to see rates with a four in front of them, they’re getting a pretty good deal.” Bolton feels the economists’ picks for house price growth are a “little optimistic”.
Auckland and Wellington prices are still down about 15% from the 2021 peak in dollar terms and somewhere between 25-30% once inflation is factored in, he says.
“So, we’re not talking growth as such, we’re simply talking a partial recovery.”
Progress, Bolton says will come in fits and starts. “Different parts of the market will bounce back to different degrees, depending on things like buyer demand.”
No sudden upturn
Property analytics company CoreLogic tends to agree. While its chief economist Kelvin Davidson believes the recent downturn in property values could come to an end soon, it won’t give way to a sharp or sudden upturn.
Although Davidson agrees with the RBNZ’s growth prediction, he says it is modest given how deep and prolonged the market’s downturn has been since late 2021.
Since then, he says the market has just been ticking along with no clear direction of travel.
“Interest rates coming down will support housing market activity and prices, but on the other hand jobs are being lost.
This year will be one of conflicting forces, Davidson says.
“Interest rates coming down will support housing market activity and prices, but on the other hand jobs are being lost.
“Lower interest rates will clearly benefit new borrowers and the pass-through to existing borrowers’ actual payments will also be brisk, given that about 10% of loans are floating and another 40% are set to roll onto new fixed rates within six months.
“The flip side of lower interest rates is the greater impact the RBNZ’s new debt-to-income tool will have and may even stop potential house buyers.”
He says factors pushing in the other direction are the record level of listings and the weak labour market.
“It’s not really a buoyant market and will still be underwhelming this year. House sales might rise from about 80,000 last year to about 90,000 this year, which is only back to average.”
Davidson says it will be a subdued upturn, which was seen before and after the GFC. “It could be another couple of years of a slow grind.”
Stronger activity expected
Westpac senior economist Satish Ranchhod believes house prices will rise considerably this year as the lower mortgage interest rates kick in and improving economic conditions help steady the ship.
He says while the housing market has been soft, that is expected to give way to stronger activity in the next few years.
“With inflation now back at about 2%, we expect the RBNZ will cut the official cash rate by another 50 basis points next month,” he says.
Kiwibank chief economist Jarrod Kerr has a similar prediction, although he says the RBNZ needs to cut harder and faster.
He says while the housing market has been “stumbling sideways” over the past 18 months that is set to change, but the housing crisis is still a long way from being solved.
“Yes, there was an unsustainable 46% surge out of Covid. Yes, the RBNZ orchestrated an 18% correction back to more sustainable levels, but over the past 18 months, house prices have gone nowhere.
“That will change this year. Interest rate cuts will fuel confidence, and confidence will generate activity.”
Kerr says Kiwibank is in the “highly unusual” position of lending more to first home buyers than investors, but investor activity had risen over the past three months. The bank has also taken a 25% market share of all home loans over the past few quarters.
Feeling the pinch
However, Trade Me says landlords are having to shave rents as there is an oversupply of rental properties – the highest number since 2019 – advertised on its website.
The number of properties advertised was up 36% in November compared to the same month last year, and up 4% compared to October.
The median advertised rent was $630 a week in November, down $5 compared to October.
The biggest percentage declines in rent during November compared to October were in Gisborne -7.9%, Otago -7.7%, Marlborough -6.0%, and Hawke's Bay -3.1%.
In Auckland, the country's largest rental market, the median advertised rent declined by -0.7% in November.
"As a result of the oversupply, landlords may need to soften price expectations to meet the current market, which continues to favour tenants," Gavin Lloyd Trade Me property customer director says.
Cashflow challenges
For property investors, ANZ chief economist Sharon Zollner says interest rate cuts and the resultant reduction in debt servicing costs have been of great benefit, but mortgaged investors are still likely to face cashflow challenges, with rental yields still low relative to history (aside from the boom in house prices through the early Covid period).
“Costs for landlords have increased markedly, with local authority rates and insurance costs having surged in recent years.”
Zollner says a lift in sales volumes is ultimately required for a meaningful upswing in house prices, with existing market dynamics still in “loose” territory, reflecting a backlog of stock on the market as new listings have outpaced sales over the past year.
“The sales-to-listings ratio, which tends to give a three-to-six-month lead on house price momentum, continues to suggest momentum is southbound.
“Total housing market inventory is at the highest level in nearly a decade, likely to put further downward pressure on prices in the near term.”
Improvement coming
Meanwhile REINZ chief executive Jen Baird says while the housing market remains subdued, there has been a noticeable rise in confidence that conditions will improve in the coming months.
“The signs across the country are largely of stability with slight house price drops year-on-year. It is in line with what we expect over the summer holidays.”
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