Property prices fall at slower rate as trough is close

Reports from CoreLogic and ANZ show while property prices are still falling they are dropping at a much slower rate, suggesting they are not far away from the trough.

CoreLogic’s latest House Price Index shows  property values across the country continued to fall in May, down 0.7%, but the annual rate of change has eased, providing tentative evidence the downturn is winding up.

Nationally, average values are 10.2% lower than the same month last year and $121,000 below their peak, but still $194,000 higher than the pre-covid level of March 2020, with the annual rate of change easing slightly from -10.3% in April.

CoreLogic research head, Nick Goodall says various indicators such as moderating house price falls and the latest RBNZ forecasts for the Official Cash Rate, which is expected to have now peaked, were positive signs for home owners.

“While the OCR is at a relatively high level of 5.5% following a total increase of 525 basis points over the last 20 months, this expected ceiling for interest rates reinforces our view that a possible floor in prices is approaching,” he says.

“This has been an exceptionally fast and impactful monetary policy tightening cycle and the RBNZ has effectively said now is the time to pause, and wait and see how this plays out, as mortgage holders continue to adjust to increased mortgage payments, reducing spending elsewhere in the economy.”.

Goodall says mortgage holders and aspiring home owners should now be able to quantify the worst-case scenario for their mortgage repayments, which will give both them and their bank confidence in assessing serviceability test rates.

Additionally, while NZ credit bureau Centrix has observed a lift in mortgage arrears to 1.31% in March, up from the recent low of 0.94% at the end of 2021, the NZ Bankers Association reported at the end of last year almost 45% of mortgage holders were ahead on their repayments.

“This is consistent with estimates from mortgage advisers that through the period of falling interest rates, roughly half of all borrowers opted to keep their repayments at the same level as their old schedule when refixing at lower rates,” he says.

“It seems the majority of borrowers are well placed to adjust to the higher repayments likely due to growth in wages and reduced spending elsewhere.”

More vulnerable sectors are likely to include first home buyers who bought around the peak of the cycle who haven’t had the benefit of time to accrue equity in their home or a savings buffer, along with lower income households where balance sheets are likely to be more thinly stretched, Goodall says.

Earlier this week ANZ predicted a relatively sharp turn on house prices with a 1.6% quarterly increase in house prices in the September and December quarters.

The country’s biggest mortgage lender had previously predicted a 0.4% decline in the September quarter and 0.4% increase in December. It is an earlier turnaround from its forecast of June 2024.

The bank says housing tailwinds now appear to be blowing a little stronger than headwinds, but it not convinced the RBNZ will allow that to run and might have to lift the OCR again in November. 

Falls in value

CoreLogic’s HPI shows value falls in Tauranga accelerated over the month (-2.3%), while in Dunedin it was the second month in a row with little or no change (0.0% in May and -0.1% in April).

Despite signs of moderation across parts of the country, all main centres have still fallen at least 1.9% over the past three months, including Christchurch which has generally been more insulated from significant falls in this cycle.

Over the past year, most main centres had a reduction in the rate of decline, excluding Christchurch (-4.3%, from -3.6% in April) and Tauranga (-13.2%, from -11.4% in April). The average property value in Tauranga has almost fallen below $1 million, at $1.02 million. Another fall of 2.2% or more would take it below the seven-figure benchmark.

Potential gains wiped out

The average value in the wider Wellington area fell below $1 million in September 2022 and has now dropped to under $900,000 – a level not seen since January 2021, wiping out potential gains for anyone who bought in the past 27 months.

The Wellington area remains the worst performing market when compared to the recent peak (21.3% down), however signs of stabilisation are now under threat as the rate of decline accelerates again.

“Perhaps the inconsistencies of the Upper Hutt market perfectly encapsulate a market trying to find its feet, with a quarter of peak value now wiped out. The encouraging sign in April of a 0.1% increase has now been superseded by a 2.5% fall in May, quashing suggestions that market has bottomed,” Goodall says.

“Similarly, Wellington City values fell back into the negative (-0.7%) after a minor lift in April. Like Tauranga, the average value has fallen closer to $1 million, sitting at $1.02 million at the end of May.”

However over three months both Lower Hutt (-1.0%) and Wellington City (-1.6%) have had a genuine moderation in falls compared to Upper Hutt (-5.3%) and Kāpiti Coast (-4.9%).

Auckland is different

Franklin is a part of Auckland which has performed differently to the rest of the Super City. Goodall says this could be due to the relative affordability of the area, along with lifestyle preference with an increasing share of next home owners picking up property here.

“Values in Franklin are 4.5% higher over the past three months and ‘only’ -8.2% down over the past year. Similarly, Auckland City has had values fall -8% over the past year, and are essentially flat (-0.1%) over the past three months,” he says.

Meanwhile, the rest of Auckland generally had values fall by about -1% over the month, with the exception of Rodney, where average vales dipped -1.9%.

Interestingly, Papakura, the most affordable part of Auckland, has fallen the furthest over the past three months (-5.8%) and -17.5% over 12 months. It’s possible an over investment in new developments could be driving the larger falls.

Regional house price index results

Queenstown’s remarkable defiance in the face of the broader downturn is certainly a point of interest, while on a much more reduced scale Invercargill’s market has also held up relatively well, down only 5.9% in the past year and 7.3% below the peak value of $482,000.

At the other end of the scale, Napier and Palmerston North are roughly 14% down in the past year and Gisborne’s average value (-11.6%) has now dropped under $600,000.

Other than Queenstown, Whanganui is the only other city to see values increase over the past three months – the lower average value perhaps attractive for prospective buyers on the hunt for value for money and/or decent yield, which at an average of 4.6% (gross yield) is one of the highest in the country, Mr Goodall said.

Property market outlook

As evidence mounts the housing market is approaching a trough increased consideration is now being given to what happens next, says Goodall. 

“Amid a stabilisation in the cash rate, slightly loosened loan-to-value ratio limits, reduced supply with fewer people listing their property for sale, strong net migration and a positive turn in Australia’s housing market, there’s confidence that the bottom is approaching,” he says.

“Affordability, hindered by high prices and contractionary monetary policy will likely keep a lid on demand for the foreseeable future. More than 50% of the average income is required to service an 80% LVR mortgage in Aotearoa compared to 43% in Australia and if property values and interest rates now start to plateau, this is unlikely to improve.”

Anticipation of a National-led Government could bring some investors out of the woodwork sooner rather than later, while a similar concern about the very likely introduction of debt-to-income limits in early 2024 could also encourage determined investors to get in prior, Goodall says.

However, the property investment landscape has changed, with the phased removal of interest deductibility impacting profits, increased regulation favouring tenants and land supply reform potentially impacting the appetite for property investment.

“Indeed, there appears to have been a change in investor behaviour due to the interest deductibility exemption for new builds. During the first quarter of this year, 34% of settled new builds went to mortgaged investors, while only 19% of existing properties went to the same group,” he says.

“After years of relative consistency between these two property types, the diversion appeared from the first quarter of 2021, when the share was 28% for both. For properties acquired before 27 March 2021 interest deductibility is being phased out over a four-year period, for properties acquired after 27 March 2021 any interest incurred (from 1 October 2021) will no longer be deductible.”