Why NZ Housing Market May Send A Warning Signal To Other Economies

Why NZ Housing Market May Send A Warning Signal To Other Economies

Roger Pettingell Sarasota Real Estate


Summary

  • The New Zealand
    housing market has shown signs of a rapid decline, with
    prices falling by 2.3% in the three months through
    June.
  • Economists across the globe fear that the New
    Zealand housing market might foreshadow what they could
    experience in the coming months.
  • Auckland has
    consistently bucked the trend, with the city expected to
    skirt any price corrections.

The New Zealand
housing market faces yet another challenge of plunging house
prices. Interest rate hikes by the central bank have led to
a housing price fall unseen in 13 years. CoreLogic data
suggests that prices fell 2.3% in the three months through
June, the biggest quarterly drop since 2009. These reports
have set fire to burgeoning concerns about where the market
is headed and what it may indicate about the condition of
other economies.

Higher interest rates, tighter
lending conditions and increasing affordability constraints
have spiralled into a slowing market. Rising interest rates
have taken away a major chunk of housing demand. Experts
suggest that demand may not recuperate till interest rates
start to fall again.

However, for now, the Reserve
Bank of New Zealand (RBNZ) is expected to tread on its
monetary tightening path to keep inflation under control.
Further interest rate hikes are expected, pushing mortgage
rates higher. Thus, the saga of soaring NZ housing prices
has come crashing down to an abrupt stop, with future rate
hikes posing as road bumps for the market.

GOOD
READ: New
Zealand inflation hits 32-year high at
7.3%

Alarm bells ringing across
economies

New Zealand’s housing market has
been a colourful story to tell, as the country witnessed one
of the highest price surges ever seen across the world. The
red-hot property market seen during the initial days of the
COVID-19 spread showcased a worrisome picture for the
overall economy. However, even as the housing market turns
cold, economists fear that the outcome could be equally
damaging.

Many other countries face similar situations
as rising inflation has forced many central banks to raise
interest rates. Some countries, such as the United States
and Australia, have begun their tightening cycles much later
than New Zealand. These nations may benefit from the
foresight provided by the NZ economy, with Australia
especially being in a similar situation.

Property
prices in Australia also soared at the same rate as the New
Zealand housing prices. However, due to faster monetary
tightening by the RBNZ, property prices have turned around
quicker than in Australia. However, the Reserve Bank of
Australia (RBA) has also taken an aggressive stance on
interest rates. The RBA delivered two back-to-back 50 basis
point rate hikes over the last two months.

Meanwhile,
many economists suggest a housing market downturn is
inevitable across geographies. House prices are set to
reverse as rapid interest rate tightening becomes a norm
across economies in the current period. Though most
economies might be able to skirt the possibility of an
economic recession, some amount of slowdown is sure to seep
in.

Auckland lying below
trend

Buyers in Auckland seeking a price
decline might be met with an unexpected surprise. The
Auckland housing market is not expected to observe massive
drops in prices. The historical trend for the city suggests
that prices may not be subject to much of a correction even
as the rest of the country observes a crashing
market.

Alternatively, regional markets are expected
to be in a more vulnerable position as housing prices might
take drastic downward swings. A correction may be more
pronounced in the regions of Wellington, Gisborne and Hawkes
Bay.

Regions across New Zealand are not expected to
show much of a disparity. The exception lies in the case of
Auckland, which remains comfortably below trend. Prices
across the city remain elevated compared to their normal
levels relative to the rest of the country. Thus, Auckland
buyers might be left unsatiated in the middle of the current
housing price decline.

Experts suggest that further
declines in house prices can be expected across New Zealand.
However, a more concerning situation may arise if households
default on mortgage debt. A high default rate could take the
economy down and create severe chaos. However, these fears
may not turn into reality due to the strength shown by the
labour market.

New Zealand’s low unemployment rate
and a tight labour market might just alleviate the
possibility of an economic recession. However, housing
market players are already locked in a serious situation,
with no clear resolution in sight. Rising interest rates
would act as a double-edged sword in a period of slowing
demand and soaring inflation. Thus, the following months
would be critical in understanding how New Zealand’s
post-COVID recovery has turned out.

GOOD READ: RBNZ
delivers another rate hike, OCR up 50
bps

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