07 August, 2020

Housing Market Update - False Dawn


  • The housing market appears to have sailed through lockdown with house prices rising at a good rate.
  • However, appearances are deceiving. Temporary supporting factors will soon end, while headwinds for the market will intensify.
  • Although annual house price declines may not be as large as previously expected, significant declines remain on the card – perhaps in the range of -5% to -10%.

Is that the Sun?

New Zealand house prices have so far been relatively undented by lockdown and COVID-19 uncertainties. In June, house prices rose 8.6% from June 2019, which is around the fastest pace of house price inflation since mid-2017.

All New Zealand regions experienced annual house price gains, with Manawatu-Wanganui and Hawke’s Bay recording the largest annual house price rises. At a finer level, the only district to experience annual house price declines was Queenstown Lakes District, which experienced an annual decline in house prices of 7.6%. This area was most directly affected by foreign tourist numbers drying up due to the closing of New Zealand’s border.

After a substantial dip in house sales in April and May due to lockdown, house sales bounced back to a certain degree in June. This was no doubt partly due to pent up demand from lockdown.

Recent Factors Supporting Housing

Three factors are likely to have supported housing demand and house prices through the depths of lockdown and immediately beyond:

  • Government support, including wage subsidies and mortgage deferrals, which will have maintained incomes, prevented worker layoffs, and reduced distressed house sales.
  • A large decline in the supply of houses for sale – the total number of properties available for sale nationally decreased by -11.7% in June compared to 12 months ago. Combined with pent up demand for houses from lockdown, the reduced supply likely put upward pressure on house prices.
  • Declining mortgage interest rates to record low levels and solid growth in mortgage lending (shown in the chart below) have helped to support the housing market.

More Darkness Before Light

Wage Subsidy Will Be Removed

Despite recent housing market resilience, the environment will be more challenging in coming months. First, the current wage subsidy expires in September and the Prime Minister has at this stage ruled out extending the scheme. Although the Government will continue to provide support to workers and businesses affected by COVID-19 in various ways, this will be more targeted and substantially reduced in size. Consequently, businesses that have been on life-support, predominantly in the travel and tourism industries, will be under further stress when the scheme ends. This will likely result in further staff layoffs.

Unemployment Will Rise

The unemployment rate fell to 4% in the June quarter from 4.2% prior to COVID-19, as the labour market was supported by wage subsidies and other handouts for businesses and workers and unemployed workers stopped looking for jobs. However, the 10.3% fall in hours worked and the substantial rise in underemployment – those in the workforce that would like to work more hours – tells a story of a labour market on the edge of significant further deterioration. Reduced Government support will be a catalyst for that deterioration.

Historically, house prices have shown a reasonable link with the unemployment rate – as unemployment rises house prices decline. This relationship has tended to be clearer even than the relationship between mortgage interest rates and house prices, as suggested in the two charts below. Generally, a one percentage point increase in the unemployment rate leads to around a 0.8% decline in annual house price inflation. With New Zealand unemployment perhaps rising to 7% or 8% by the end of the year, this will put significant downward pressure on house prices.

Migration Drastically Reduced

A major positive driver of house prices in recent years has been record net inward migration. The closure of New Zealand’s border to everyone except returning New Zealanders after a two-week spell in quarantine deprives the local housing market of an important source of housing demand. This will be another factor weighing on house prices going forward.

Mortgage Lending Criteria Tightening

Another key factor that could contribute to house prices heading south in coming months is a possible tightening in bank mortgage lending standards. A Reserve Bank of New Zealand (RBNZ) survey of credit conditions for June suggests that banks have already been tightening their criteria for mortgage lending and are likely to continue to tighten standards over the next six months, shown in the chart below. This will make it harder for people with smaller deposits and less certain income to borrow for house purchases.

Increase in Housing Supply

On the supply side, a recent strong increase in residential construction, as indicated by the robust rise in residential new dwelling consents (shown in the chart below), is adding to the stock of housing. There are also anecdotal reports that with the drying up of overseas visitors holiday rental owners are instead letting their houses in the domestic rental market, which is further adding to housing supply.

Narrowing Gap Between Housing Supply and Demand

The gap between the annual supply and demand for houses has been narrowing over the past four years to the point that both are now broadly in balance, as the chart below indicates. Lower demand for housing due to lower incomes, tougher mortgage lending standards, drastically reduced inward migration, and increased houses entering the market will likely result in supply clearly exceeding demand in the near-term. This is likely to lead to softer house prices.

Significant House Price Declines Still Expected

In April, we predicted that house prices could fall anywhere between 10% to 15% this year as the economic activity declines and unemployment rises in the wake of the lockdown and border closure. Several bank economists predicted house price declines of a similar magnitude. Although house prices appear to have sailed through recent travails without missing a beat it is likely that tough times are still ahead for the housing market. We expect house price declines will not be as severe as we initially predicted but still expect declines in the range of -5% to -10% in 2020.

This advice is general or “class” in nature, not specific or personalised to you. It does not take into account your financial situation or goals and, accordingly, does not constitute personalised financial advice under the Financial Advisers Act 2008. If you require personalised financial advice, there is a process to go through before that can be provided to you.

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