House prices are dropping (finally), but will they go up again?

For many years, house prices in New Zealand have increased year on year at an exponential rate. Even during the thick of the global pandemic, they continued to rise. But with recent changes in the market, economists are saying that trend isn’t likely to continue in 2022. Credit conditions, higher interest rates and an oversupply of new builds are all contributing factors that could see house prices drop by 9% this year. Here’s what that all means for potential first home buyers and current homeowners – and when house prices could start rising again.

House prices are dropping – why?

While most of the headlines read along the lines of ‘NZ property market crashing’, Westpac’s chief economist Michael Gordon points out that “the slowdown we’re forecasting looks more to be a soft landing, rather than a crash.” ASB is calling it a “modest decline”.

According to ASB and Westpac, the causes are these three economic changes:

1. Tighter credit conditions:
If you’ve ever had a home-loan application unexpectedly declined by a bank, you’re in good company. It’s been a common occurrence since the new CCCFA rules were set. When they were announced in December 2021, home loan approvals went from 30,000 a month to 23,000 – with minor frivolous spending (like weekly drinks) marked as the reason for many rejections. The intention was to make sure lenders were being responsible and protect borrowers against bad debt. But the ‘onerous’ rules mean potential buyers need to jump through a lot of financial hoops to get on the property ladder.

Now, with inflation and petrol prices putting even further pressure on our budgets, the credit conditions are even harder to meet. This has contributed to a slowdown in buyer demand.

2. Higher interest rates:
Low interest rates were a huge contributor to the housing boom of last year. So, it’s no surprise that the current decline is affected by a jump in mortgage rates. According to Kiwibank economists, mortgage rates will be double what they were a year ago – over 6% by the end of 2022. The rise is a reaction to the increase of the official cash rate which is, in turn, a reaction to high inflation.

3. Increased supply of new builds:
It was a solution to the housing crisis a few years ago – could we build our way out? In 2021, 27,875 new homes were built. This was a huge jump from the previous few years as government incentives got developers excited about the profit potential. But as in the nature of supply and demand, eventually it plateaus – and the market price adjusts. In this case, the extra supply has come at the same time as higher mortgage rates, tough credit conditions and a higher cost of living. Now we’re seeing signs of an oversupply, as more people want to sell rather than buy.

When will house prices rise again?

Economists are predicting a “house price inflation recovery” which would see prices start rising again by the second half of 2024. This will be when the New Zealand economy settles down from the effects of the pandemic and starts to rebuild. The government will likely take note of the root causes and start to rectify the problems by slowing down new build investment, loosening credit conditions for first-home buyers and helping to stabilise interest rates.

An opportunity for first-home buyers

There could be better times ahead for first-home buyers. A price drop and supply increase will mean the best shot in years of buying something suitable – and within budget. Buyers may find they’re the only ones putting in an offer, versus huge competition this time last year. This means buyers have more bargaining power and can negotiate a lower price, which will go a long way in managing the higher interest rates on a new home loan.

A pinch ahead for current mortgage holders

Many Kiwi borrowers nabbed fixed-term mortgages set at rock-bottom pandemic rates and may be looking at a huge jump in repayments. Fortunately, the CCCFA rules meant most home buyers were required to pay a 20% deposit, and investors 30-40% – protecting them from negative equity.

The domino effect: house prices are always changing

Right now, the property market is cooling off after an incredibly hot streak. While it’s notoriously hard to predict when house prices might rise again, historically they’ve always recovered. A few things will need to happen between now and then, but in the meantime, if you’re a first-home buyer, you can avoid negative equity by buying a home when market prices are low, putting more money down and buying a home you can afford. For homeowners faced with increased monthly repayments, check out our blogs ‘Is it smart to refix your mortgage now’ and ‘Do you fix for one year or longer’.

For help finding the best mortgage rates or restructuring your existing home loan, talk to a Global Finance expert today.

**These are general guidelines and are by no means a reflection of bank or lending policies