House prices, rent rises to be restrained in the short term: RBNZ

House prices and rent increases are likely to be restrained in the near term because of the softness of the housing market, the Reserve Bank says in its latest financial stability report.

“A large volume of unsold properties and weak net migration are expected to continue to restrain house price and rent increases in the near term,” RBNZ says.

“Residential building activity remains constrained by low demand.”

Demand for credit from both households and businesses remains soft despite lower interest rates and with rising unemployment weighing on households.

Banks have reported they have been easing presale requirements for some property developers to support lending while non-bank lenders, including international investment funds are also contributing to financing new developments.

“Household borrowers have been resilient to high debt-servicing costs. Non-performing loans are around the peak and may decline in the coming months as debt-servicing costs start to fall, easing financial stress on borrowers,” RBNZ says.

High interest rates, the soft housing market, weak labour market and slowing net migration flows have dampened consumer demand

“National house prices have been largely unchanged over the past year, remaining around 13% below their peak in November 2021,” RBNZ says.

“House prices remain around the top of our range of sustainable house price estimates. Sales volumes have increased as mortgage rates have declined.”

Mortgage lending has picked up in the last six months but remains below its peak before November 2021 and a high proportion of mortgage demand has been from borrowers switching loan providers.

RBNZ noted that investor activity has increased over the past year, supported by lower interest rates and changes in government policy, including the reintroduction of mortgage interest deductibility and changing the brightline test period back to two years from 10.

The recently introduced debt-to-income restrictions (DTIs) “are currently minimally binding” with high-risk lending low.

“DTIs will act as a guardrail against a potential resurgence in risky credit as interest rates decline and housing demand picks up.”

RBNZ noted many borrowers have rolled off fixed rates onto floating or shorter-term fixed rates because they are waiting for further cuts in the official cash rate (OCR).

The OCR is currently 3.5%, down from 5.5% since August last year, and RBNZ is expected to cut it to 3.25% later this month.

“The effected (weighted average) mortgage rate across all borrowers remains close to its peak. We expect around 60% of mortgage lending to reprice to lower rates within the next six months and around 80% within a year.”

RBNZ says it will be considering “more granular risk weights” for residential mortgages in its review of bank capital requirements.

RBNZ says the current global economic uncertainty may lead to concerns about the sustainability of New Zealand’s current account deficit, which was 6.2% of GDP in calendar 2024, could lead to a rise in the country’s risk premium.

“Businesses and households may find it harder to access credit as banks tighten lending in response to higher funding costs,” it says.

Artificial intelligence could lead to a rise in structural unemployment with the potential for more credit and mortgage defaults but a survey last September showed only 8% of surveyed organisations had experienced any AI-related job displacement.

Any weakening of the domestic economy in response to US tariffs “could materially affect indebted households and businesses. This is a key risk to financial stability,” RBNZ says.

The uncertainty may also amplify the domestic impacts of tariffs because businesses could further delay investment plans – they have already delayed such plans because of the weak domestic economy.
But volatility in global equity markets is unlikely to shift household wealth enough to materially affect domestic consumer spending – it notes listed equities make up about $80 billion of KiwiSaver funds compared with the about $1.6 trillion value of homes and residential land.