House prices in New Zealand are booming as the rate rises

House prices in New Zealand are booming as the rate rises

Anne Bate felt “crazy” trying to shrink in the midst of a global pandemic. But selling her home in the paradise of the fishing village of Pahi in the northwest of the north island of New Zealand proved to be an easier part.

It was in Timar, its destination some 1,360 km away on the South Island, that Bate experienced the other side of the market. “It was like fast and dead,” she said. Even as a cash buyer, she said it was a “miracle” that she was able to find a place and get closer to her grandchildren.

New Zealand was in the midst of one of the biggest real estate booms in the world. A relatively safe haven, with a relatively small number of Covid-19 cases, the average house price has risen 43 percent in the past two years, according to Sense Partners, an economic consultant.

That left the purchase of a house out of the reach of many Kiwis. With the average house price now ten times the average annual income, the government and the central bank have struggled to find ways to cool the market without causing a crash.

The country is an extreme example of what happened to real estate markets during the pandemic. Prices have risen from Canada to Australia since the first quarter of 2020, when policymakers launched fiscal and monetary stimulus. Wage growth, meanwhile, has been more modest.

Now, as inflation rises around the world, buyers and sellers are waiting to see what will lift the stimulus of central banks and governments and rise through rates will do in the real estate marketand the wider economy.

The New Zealand Reserve Bank began tightening monetary policy last October, after an 18-month period during which its reference cash rate was just 0.25 percent. The rate has risen sharply to 2 percent and is expected to reach 4 percent within a year as the bank tries to expel inflation – which now stands at nearly 7 percent – from the system.

“To some extent, New Zealand is a canary in a coal mine,” said Kelvin Davidson, chief real estate economist at CoreLogic in Wellington. “It’s a test case for the central bank to raise rates as house prices rise to cope with inflation.”

Its ability to keep Covid-19 under control for most of the pandemic has led to a smaller decline in New Zealand than in other economies. The relatively strong growth – and the change in the mandate of monetary policy makers so that they must confront any risk that property prices pose to financial stability – means that the central bank was among the first to react to signs that the economy was overheating.

House prices in New Zealand are booming as the rate rises

The impact of these increases, accompanied by tighter lending conditions, such as narrowing the amount of high-risk mortgages with high credit-to-value ratios, is strongly felt in the real estate market.

Real estate agent Barfoot & Thompson estimates that sales will fall to about 60 percent of the level seen last year. “House prices in New Zealand are falling and all signs point to further deterioration in the coming months,” said Ben Udy, of Capital Economics. He now expects the fall in house prices from the top to the bottom to reach 20 percent, which is twice as much as his previous forecast.

But even a 20 percent drop would only bring house prices back to 2020 levels. The real risk to New Zealand’s economy is that households are dramatically reducing consumption to protect the wealth that the housing boom and low rates have helped create.

Shamubeel Eaqub, an economist at Wellington-based Sense Partners, estimated that housing wealth increased by 460 billion New Zealand dollars, or 295 billion dollars, during the pandemic. New Zealand’s gross domestic product in 2021 amounted to 350 billion New Zealand dollars.

New Zealand is a special example of an economy where “consumers are more sensitive to house prices than elsewhere,” Udy said.

With central banks now raising rates around the world – and expected to tighten further in the coming months – the big question is whether other markets will follow New Zealand’s decline.

Real estate agents remain optimistic. “While markets will slow down, I don’t think we will see a global drop in prices. The rate of price growth will only fall and soften over the next few months, ”said Kate Everett-Allen, partner and head of international residential research at Knight Frank.

Economists are more skeptical. Innes McFee, chief global economist at Oxford Economics, noted a period of “very weak price growth” as higher rates increased mortgage costs. Vicky Redwood, a senior economic adviser at Capital Economics, believes prices will fall in the UK, Australia, Canada, Sweden and Norway, as well as New Zealand.

Some New Zealanders see a silver background due to the bursting of the housing bubble that many are struggling to climb the property ladder. Home ownership is at its lowest level since the 1950s, according to Eaqub. He noted that about 4 percent of New Zealand’s tax revenues are spent on housing assistance.

Tobias Otting, a 29-year-old consultant at CoreLogic who wants to buy a house in Wellington with his partner, witnessed a conflict between sellers trying to keep prices down and buyers wanting prices to fall. “Reality is emerging. “It’s a customer market now,” Otting said. “We have the luxury of being patient.”



Source link

Leave a Reply