Has the Tide Turned on Housing Affordability

Last week the Reserve Bank decided to hold the Official Cash Rate (OCR) at 5.50% rather than increasing it, citing these factors - demand in the economy continues to ease, subdued economic growth both locally and overseas, falling export prices and easing inflation.

The Reserve Bank also commented that the OCR needs to stay at a “restrictive level” which in English means do not expect interest rates to fall any time soon!

What affect, if any will this have on the New Zealand housing market and will it return to the more affordable levels as in the pre covid times?

The New Zealand property market “peaked” in November 2021 and based on current data it “bottomed out” in May 2023 with average prices dropping between these dates by approximately 18%. With the drop in property values, it was expected that affordability would continue to improve for the rest of the year and into next year due to low sale volumes, high interest rates, the slowing economy and not forgetting an Election!

The recent rises in mortgage interest rates have more than offset the benefit of reduced purchase prices, and the gap is even larger for those buyers with less than a 20% deposit due to the Low Equity Premiums charged by banks. Offsetting the fall in house prices against the increase in interest rates means, on average a first home buyer purchasing today has to find around an extra $55 each week to make the mortgage payment than if they had brought the same house a year ago. That is $2,857 after tax extra a year!

Despite this, there are now more first home buyers entering the market and I have certainly seen this in my business. First Home buyers have been holding back from the market since early 2021 and have saved larger deposits, they have a good degree of job security, some have enjoyed strong wage growth, average house prices have fallen, and with rents rising, the gap between renting and owning is getting smaller.

Migration has also increased faster than expected with an estimated net migration gain of 96,200 in the year to July 2023, which increases the demand for housing and puts upward pressures on rents.

Credit Criteria has also eased recently in terms of the LVR and CCCFA rules.

The number of permits approved to build new houses has also fallen sharply with some commentators again talking about a housing shortage.

The Reserve Bank is estimating house prices increases of around 3% in 2024, but 2025 could be a different story!

I would not expect housing affordability to get any better in years to come