OCR increases and rising home loan interest rates mean households are going to have to adjust

PHOTO: Mortgage rates are set to escalate in 2022. FILE

CoreLogic Property Market and Economic Update wraps up 2021

CoreLogic NZ’s latest Property Market & Economic Update released today highlights the New Zealand property market likely moved through its peak rate of growth late in 2021, following a raft of political interventions designed to cool the overheated market.

The total value of residential real estate reached $1.72 trillion at the end of Q4 2021, up from $1.35 trillion at the end of 2020, with mortgages secured against 19% of that value, and the other 81% household equity.

CoreLogic Chief Property Economist Kelvin Davidson cautions that despite seeming quite sound at that headline level, household debt is high relative to income.

“To some extent the debt has only been sustainable recently because of low mortgage rates,” says Mr Davidson.

“However, OCR increases and rising home loan interest rates mean households are going to have to adjust their finances fairly quickly to ensure they stay on an even keel with the lending environment changing for everyone.

“Owner-occupiers now face a much smaller availability of low-deposit loans, while the CCCFA regulations have caused far more disruption than expected. All borrowers are having to face up to the reality of significant mortgage rate increases too, with a further rate hike expected to be announced in February’s review.

“While any further rate rises could be smaller and slower than those experienced in the second half of 2021, we can’t overlook the fact that about 60% of existing loans need to be refinanced within the next 12 months. Anybody who fixed for a year in about April/May 2021 could potentially see their mortgage rate double when they review mid-this year, which can have a significant impact on household budgets,” says Mr Davidson.

Banks less willing to lend

Supply and demand rebalance

CoreLogic data is already seeing sales activity slow as the market reacts to previous mortgage rate increases and previous changes to lending and tax rules.

“Towards the tail end of 2021 there were clearer signs of an easing in the tight supply/demand balance in many parts of Aotearoa. Wellington and Dunedin have seen total listings rise quite noticeably, as new stock flowed into the market but transactions eased. However, this rise in available property will take some time to show through more clearly in price measures,” says Mr Davidson.

He adds that traditionally, when sales slow, so too does price growth in due course.

“Some areas are probably a little more vulnerable to outright house price falls than others, but in general anybody hanging out for a major bargain may be disappointed – with unemployment still low, the story is more about much slower growth in prices rather than meaningful falls. But of course, there’ll still be opportunities, and the tighter lending environment may play into the hands of those with cash/equity at the expense of others.

Buyer market share

CoreLogic’s Buyer Classification series showed that over the course of Q4 2021 mortgaged investors managed to raise their share of purchases from 24% to 25%, pinching a percentage point from movers, whose market share eased down from 27% in Q3 to 26% in Q4 – the lowest figure since Q3 2020.

Meanwhile, first home buyers (FHBs) have held on to their 26% market share in the past few months, even as values and required deposits have increased.

Mr Davidson says the small bump in investor market share is still well down on Q1 2021’s peak of 29%.

“To be fair, the lingering disruptions from COVID and the alert level changes mean that these market share figures are likely based on a smaller number of deals than probably would otherwise have been the case. But even so, it’s clear that mortgaged investors’ appetite to purchase property has waned, although they will no doubt still be eyeing up new-builds.”

Construction

Mr Davidson flags that another key theme for 2022 will be construction – output, capacity, and cost growth.

“Clearly, the LVR and tax system now incentivise both owner-occupiers and investors to seriously consider a new-build purchase. And this should give developers confidence to keep building more new houses. However, the industry is already red-hot and costs are rising quickly. Even despite solid demand, it’s probable that we may see new dwelling consents tail off a bit this year as the cost to build just gets too high for some households,” says Mr Davidson.

When looking ahead, Mr Davidson says it’s going to be another fascinating year for the property market, not least because COVID remains a wild card as Omicron’s impact on the country remains uncertain.

“The recent move to red is a clear signal that COVID’s disruption is not yet done, which may cause some turbulent times for the NZ economy and property market in the months ahead,” says Mr Davidson.

“However, despite this, we suspect that by mid-2022 the balance of power could tip towards buyers. It certainly wouldn’t be a surprise to see average value growth slow from almost 30% in 2021 to single digits in 2022. The potential swing factor for whether or not we see property values actually fall on a more widespread basis is probably unemployment.”

However for now, with unemployment very low and looking likely to stay that way, outright house price falls aren’t CoreLogic’s central expectation, but Mr Davidson says they will be watching unemployment very closely, with any slowdown in the labour market further into 2022 a risk to house prices.

For more information or to read the CoreLogic Property Market and Economic Update, visit www.corelogic.co.nz/reports.