HighlightsThe New Zealand economy has witnessed negative growth in the first quarter, but the central bank is keen on raising
rates.The housing market is now not as hot as it was last year, but this price affordability is marred by rising costs of a
mortgage loan.Many fear that if the economy loses further steam in the wake of global and local concerns, it can negatively impact
mortgage repayments.
The world economy is going through a rough patch, but is this simple statement enough to understand the ground
realities? In the US -- the world’s largest economy, which is often considered a gauge -- indicators seem to be pointing
toward a conflicting scene. On the one hand, there is widespread concern about a deep recessionary phase. On the other
hand, July job opening data indicated that nearly two jobs are available for every jobless person. One might wonder why
there are so many openings when the economy is heavily subdued and corporates are reporting muted earnings.
In New Zealand's comparatively very small economy, indicators are equally confusing. In December last year, the Prime
Minister had to calm the nerves by declaring that her government was “determined” to bring down house prices to an
affordable level. Her statement came in the wake of record high prices, up over 23% annually in November 2021. The
median house price in the country peaked to NZ$925,000, and in Auckland, it hovered above NZ$1 million. All this was
when the NZ economy had declined by 3.7% in the September quarter.
Do house prices have a correlation with overall economic growth? Can it be assumed that when the economy is booming and
people have money, house prices would rise, and vice versa? Now that the economy is yet again under pressure -- it
contracted 0.2% in the first quarter of 2022 -- house prices have started to fall.Decline in house prices
The biggest relief came in July 2022 when a key indicator of the housing market -- the Real Estate Institute’s price
index -- recorded its first annual fall in 11 years. The gauge was already dropping on a monthly basis over the past
many months. The sales volume too had declined by over one-third in July month. According to Kiwibank, the country,
which has reeled from low house inventories, is set to have a supply-side surplus over the next year. If that happens,
affordability might get a significant boost, especially for low-income buyers.
What has caused such remarkable correction, if not crash, in house prices? Many analysts consider the interest rate
hikes was a key factor. Interest rate on mortgage loans was as low as 3% almost one year back, and now it stands at
anywhere over 5%. Separately, households are compelled to spend extra on necessities, including food and energy, due to
rising inflationary pressures. This must have dealt a blow to New Zealanders’ purchasing power, especially when it comes
to big-ticket purchases like a house, thereby hitting housing demand and prices.
Also read: Is NZ’s Budget 2022 going to be a `Well-Being’ one?Interest rates and inflation
Mortgage interest rates are high now as compared to the pandemic times because the central bank has subscribed to a
hawkish stance in the wake of high inflation.
The Reserve Bank of New Zealand (RBNZ) decided to hike the official cash rate (OCR) by a whopping 50 basis points in
August 2022. This was the seventh consecutive raise, and the OCR now stands at 3%, the highest level in many years. A
high OCR makes all borrowings costlier, including mortgages. Separately, the central bank also hinted toward similar
aggressive moves over the coming months, with projections that the OCR can hit 4% by early 2023.
RBNZ’s move from a deeply dovish stance during the pandemic days to now heavily hawkish is because it, like all other
central banks, including the US Fed, wants to tame inflation. People worldwide complain about high prices, which is an
outcome of multiple factors, including near-zero interest rates during the pandemic phase, supply chain concerns, etc.
In New Zealand, inflation in the June quarter was at its highest point in almost 30 years. Most things have become
costlier for Kiwis, from food to housing to transport.
Also read: NZ Facing Massive Rise In House Prices- Will It See A Silver Lining?Have housing pains eased?
Some analysts believe that regardless of the dip in median house price and improvement in supply, things are more or
less the same for first-time buyers. This is because while a rise in the mortgage interest rate does cause a dip in
demand for houses, it makes it expensive for the borrower to repay the loan in the first place. What could have been
good was a rise in income levels of Kiwis; however, a subdued economy typically does not permit strong and consistent
wage growth.
There are also concerns about buyers who acquired a housing asset during the peak frenzy of 2021. These buyers have a
negative return on their investment, which is indeed a sentiment breaker, particularly for first-time buyers burdened
with mortgage repayments. The fear is that the central bank will continue with its rate hike spree, which can ultimately
hit the economy and the jobs market. So, even though property prices are lower as compared to last year, a jump in
mortgage rates would make debt servicing difficult for first-time property buyers.
This might be one of the reasons behind a sharp drop in the house sales volume in July 2022. Low prices might not be
attractive when the economy is going through a rough patch and households are forced to deal with high costs of even the
most essential items.Uncertainty persists
The statement that the economy is in a rough patch cannot be enough to understand the ground realities. The good news is
that houses in New Zealand are now affordable as compared to last year. But mortgage repayment is becoming costlier for
prospective buyers, and concerns around an even rougher patch ahead if continued rate hikes by the RBNZ pave the way for
a deeper economic downturn. Housing demand can suffer collateral damage amid all this.