Housing affordability has plummeted over the past two years as home prices and debt levels surged, driven by record low interest rates, fiscal relief and an inability to spend on overseas travel
House prices in New Zealand, which were already elevated before the COVID-19 pandemic, jumped 43% in the two years to December 2021, according to the Real Estate Institute of New Zealand said. They’ve fallen around 1% since December.
Over the past 12 months people who have entered in that very heightened house buying frenzy will be challenged, Reserve Bank of New Zealand Governor Adrian Orr said last week, noting most households remain in a strong equity position.
Housing affordability has plummeted over the past two years as home prices and debt levels surged, driven by record low interest rates, massive fiscal relief and an inability to spend on overseas travel.
Analysts at Australian financial firm Barrenjoey said nearly 40% of loans in New Zealand were to borrowers with debt more than six times their income.
The RBNZ, which has to consider house prices in its policy deliberations, began raising the cash rate in October last year, at the time describing house prices as ‘unsustainable’.
It has so far increased the cash rate by 1.25 percentage points and forecast further significant increases.
Last week, Orr told a parliamentary committee that house prices still needed to drop as much as 20% more before they were at sustainable levels.
Some economists now see house prices falling about 10% this year.
While lower house prices would help the government’s affordability objectives, the combination of weaker asset values, soaring inflation and higher debt burdens could reduce consumer spending.
This would make it harder for recent homebuyers to repay their loans as interest rates rise.
A sharp correction remains a plausible outcome that would have broad economic implications, the RBNZ said last week.
The central bank expects that around 50% of those who bought a property in the past 12 months will need to ‘belt tighten’ if mortgage rates hit 7%. Currently major banks are offering a floating mortgage rate of around 5.5%.
