Slumping house prices good news for first home buyers

"With home values coming down and interest rates beginning to ease, affordability is slowly improving for buyers in many areas, however higher living costs, rising unemployment, the broader economic downturn and stretched household budgets continue to restrict demand," Andrea Rush, QV national spokeswoman says. 

The BNZ says housing affordability is 17% better since its low point in December 2021.

From a starting position of severe unaffordability, BNZ chief economist Mike Jones says the past few years have seen house prices – in most regions – decline, mortgage rates cut, and wage growth – while having slowed – continue to chug away in the background.”

According to the BNZ’s housing affordability index, the combination of these factors puts affordability at the least bad level since December 2020. Relative to the index low point in

December 2021, the median house is about 17% more affordable, but that’s still 7% less affordable than March 2020.

QV’s Rush says a steady flow of new townhouse and apartment completions are giving buyers greater choice and helping to limit upward pressure on prices.

The biggest price declines in the three months to August have been in Nelson, down 3.2%, followed by Wellington city, down 2.4%, Whangarei, down 1.8%, Napier, down 1.8%,

Auckland, down 1.4%, Hamilton, down 1.2% and Christchurch, down 1.2%.

Major cities show biggest improvements

Dropping prices and other factors have resulted in Auckland and Wellington having the biggest affordability improvements over the past 12 months, although they remain the most unaffordable regions outright, Jones says. 

In contrast, such has been the out performance of the Otago housing market, there’s been no obvious change in BNZ’s affordability index there despite falls in debt servicing costs and solid income growth. More generally, the degree of regional convergence over the past few years stands out.

Although flattish house prices may not have done much for the so-called wealth effect and the broader economic recovery, Jones says some of the other drivers of affordability have been moving in a helpful direction as well – the size of the required deposit, the cash required to service a mortgage, and the household incomes used to pay these bills.”

Plugging in its forecasts for house price growth, which has been nudged down to 1% for this year, income growth, and mortgage rates the BNZ sees the nationwide index basically hold its ground from here.

In behind this flattish forecast is the affordability impost of small forecast lifts in house prices, and eventual mortgage rate increases, offset roughly evenly by growth in household incomes, Jone says. 

“It’s still an improved outlook compared to our last look at the index two years ago. The difference being our softer outlook for both house prices and mortgage rates.”

Jones is quick to add that a forecast based on three forecasts leaves a huge amount of room for error.

He points to different scenarios – one in which the OCR is cut another 100bps pulls mortgage rates lower and delivers a modest affordability lift, another a hypothetical stalling in income growth will, in isolation, erode about half of the post-Covid affordability improvement.

“Of perhaps most interest, holding house prices flat for two years – a far from inconceivable scenario – will see the affordability index regain levels prevailing in March 2020. But only just, and with seven years having elapsed. It highlights how difficult it is to claw back affordability in the wake of a house price boom.”