House price falls in hundreds of thousands

CoreLogic says any change by banks to mortgage interest rates is likely to be limited as tighter monetary policy has already been priced in by the banks.

CoreLogic chief property economist Kelvin Davidson says the first hurdle has now likely been cleared in terms of the housing market downturn getting closer to ending.

However, CoreLogic’s data show the average Auckland house values were down by almost $200,000 over the past year and in Wellington values were down by almost $300,000. Across New Zealand average values dipped by $100,000. 

CoreLogic’s House Price Index shows the average value of homes across the country peaked at $1,043, 261 in March last year, but by the end of March this year it had dropped to $933,770, a decline of $109,491 in value.

In Auckland the average house value dropped by $198,680 over the same period, and in the Wellington region it was down by $282,227.

Average values have also dropped by more than $100,000 in north east Hamilton, Tauranga, Hastings and Napier, with Masterton and Carterton not far behind.

The downturn in New Zealand’s property market continued in March, with average values down another 1.1%, according to the CoreLogic House Price Index.

After a couple of ‘flatter’ months in December and January, average values have dropped at least 1% for each of the past two months. CoreLogic’s House Price index is now down 10.5% or an equivalent $109,491 over the past year.

CoreLogic NZ Chief Property Economist, Kelvin Davidson says it is important to keep the falls in context of the 43% surge between March 2020 and March 2022, with prices currently still around 30% higher than pre-COVID levels.

He said the latest falls in February and March were part of the market cycle’s more recent trend and consistent with the underlying drivers.

“Almost regardless of what the Reserve Bank (RBNZ) decides to do with the official cash rate (OCR) later today, there are now signs of a peak for mortgage rates, while employment also remains healthy. But interest rates for both new borrowers and existing borrowers who are repricing remain elevated, and this is requiring some careful budgeting,” he said.

“Mortgage availability also remains restricted and neither buyers nor sellers are in much rush, meaning market activity is low. These factors make it easy to see why property values are continuing to drop.”

Mr Davidson said the market’s expectation is for the RBNZ to announce an increase in the OCR of at least 0.25%, possibly even 0.5%, at 2pm today.

However, he said this month’s hike could also be the last of the cycle, especially if the Q1 2023 inflation data shows a clear slowdown when released on 20 April.

“With inflation still an issue, it’s not out of the question that the cash rate will increase by 0.5%. However, there are fairly clear signs that the economy is faltering and the recent global banking sector problems point to a more cautious approach from the RBNZ,” Mr Davidson said.

“At the same time, the RBNZ won’t want to run the risk that financial markets start to ‘price in’ OCR cuts in the near term, which would undermine their inflation fight to date. The language in today’s statement will still be tough-talking. For borrowers, even if the current 6.5% or so is the ‘worst case’ for mortgage rates, don’t necessarily expect them to fall sharply anytime soon either.”

Rather than taking a more cautious approach, the RBNZ keep up the cracking pace with a 50bp OCR increase. There was no relaxing of the language around inflation, with it deemed “still too high and persistent”.

The RBNZ acknowledged that recent growth has been weaker than expected. But it emphasised that demand is nonetheless running well ahead of supply, a reason for the hefty hike. Potential for more expansionary fiscal spending was on the RBNZ’s radar. And the recent flooding and cyclone recovery is now assumed to be more inflationary than the RBNZ’s initial estimates back in February. Furthermore, the RBNZ is worried that near-term spikes in inflation (as a result of the weather) will hold inflation expectations up, making the job of getting inflation under control more difficult. Another motivation for the large OCR increase was desire to prop up wholesale rates after recent falls, so as to stop bank lending rates from falling.

We have pencilled in a final 25bp OCR increase to 5.5%, taking into account how staunch the RBNZ has been. However, we see a growing risk that demand is cooling relative to the economy’s supply capacity quicker than the RBNZ is currently estimating. If we see further signs of weak demand and easing capacity pressures, then the RBNZ may judge it has already done enough. The CPI, inflation expectations and labour market data will be very critical in the run-up to the May Monetary Policy Statement.