Market update: Is NZ staring down the barrel of a major house price comeback?

Housing Market Written by David Cunningham, Sep 27 2023
Post by David Cunningham - Chief Squirrel

Post by David Cunningham - Chief Squirrel

Check out DC's latest market update below, or scroll down to read the full article:

There’s lots to cover off in this month’s market update: starting with the recession that wasn’t.

Back in June, it looked as if New Zealand had officially (if only by the slimmest of margins) slipped into recession, after clocking up our second consecutive quarter of negative economic growth.

But that all went out the window last week with the release of New Zealand’s latest GDP figures which showed the economy having grown by 0.9% over the three months to June 2023.

Driven largely by a huge boost in immigration numbers, and the solid performance of our manufacturing sector, the result was over and above market expectations — although many had predicted that we were in for some level of growth.  

At the same time, GDP results for the March quarter were revised upwards (from a 0.1% fall, to flat or no change) — meaning the economy has actually narrowly escaped the technical recession that was called a few months back.

But even though the numbers don’t quite show it, there’s no doubt that high interest rates are making themselves felt — with brutal force — for Kiwi households across the board.

Speaking of interest rates… With an Official Cash Rate (OCR) announcement on the cards for 4th October, what’s likely to happen with mortgage rates from here?

The OCR has been steady at 5.50% since May, and expectations across the market are pretty unanimous that the Reserve Bank will opt to stick at that level again on 4th October.

(Especially with election day just around the corner, pushing through another increase at this stage wouldn’t win RBNZ Governor Orr any friends.)

But looking out a little further, the market’s pretty divided in terms of where it thinks the OCR is going to end up in the coming months. And it’s this — where the wholesale markets are expecting the OCR to go next — which is the major determinant of where fixed mortgage rates are set. Even more so than where the OCR is at right now.

Some economists are firmly of the view that there’s another 0.25% or even 0.50% OCR increase to come before early next year, while others are convinced that the OCR has peaked, and will fall from here.

The view that the OCR will rise further is why we’ve seen a number of interest rate increases from New Zealand’s major banks in recent weeks, in spite of the fact that the OCR has been flat since May.

And in fact, the mortgage rates in market right now already have roughly another 0.25% OCR increase priced in — meaning the banks have effectively delivered an added OCR hike on the RBNZ’s behalf.

Over the last week or so, even Kiwibank, which had been leading the market by quite a significant margin, has increased its shorter-term fixed rates to levels more in line with the other big (Aussie-owned) banks.

It’s lifted its one-year fixed term rate from 6.99% to 7.15%. ANZ, BNZ and Westpac, meanwhile, are sitting somewhere in the 7.19% to 7.25% level, while ASB remains by far  the highest at 7.45% on its one-year fixed term.

We could see further very slight increases to mortgage rates across the major banks in the coming weeks if wholesale interest rates increase further, and depending on what happens with interest rates in the US (which are an influence on what happens here in New Zealand).

House prices are also definitely starting to stage their comeback

Anyone watching news headlines will have noticed a shift in the conversation around house prices over the last few weeks.

After 18 months of falls, the market’s undoubtedly turned a corner — with the national average house price having increased by about 0.8% over the course of August (with some variation between different regions, of course).

Most economists are now anticipating house prices will bounce back by as much as 5% over the remainder of 2023, and potentially by as much as 10% within the next 12 months.

There are two key factors working together to drive this uptick we’re seeing.

The big one is immigration. The latest immigration figures released at the start of the month show there are roughly 100,000 more people in New Zealand today than there were a year ago, through immigration.

And even though a number of those will be on short-term working visas, and not everyone will be in the market to buy, that surge has definitely created extra demand for housing across the board.

Adding to the pressure is the sharp decline in construction levels we’ve seen over the last few months. That’s been driven in large part by softness in the housing market, as well as significant increases in the cost of construction — with the cost of building a new house now higher than buying an existing one in many cases. 

Combined, these two factors are working to really bolster house prices. And some experts are now predicting that a double-digit increase in house prices over the next 12 months is possible.

In terms of buyer activity in the market, we’re continuing to see really strong share amongst first home buyers. Looking back 7 or 8 years, first home buyers made up 10% of the total dollar value of new mortgages — while today it’s more than 25%.

On the flip side, the proportion of lending to property investors has fallen from 30% to just 17% of loan value over the same period.

We’re starting to see confidence return to this part of the market, though, as a reflection of the fact that many are expecting a National / ACT government, which would see interest deductibility fully reinstated on investment properties by 2026.

The opinions expressed in this article should not be taken as financial advice, or a recommendation of any financial product. Squirrel shall not be liable or responsible for any information, omissions, or errors present. Any commentary provided are the personal views of the author and are not necessarily representative of the views and opinions of Squirrel. We recommend seeking professional investment and/or mortgage advice before taking any action.

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