We still expect house price growth will fade away.
- Recent policy changes targeted at investors look to be cooling housing market activity according to the latest REINZ housing market data. Sales across the country were 13% down in May when seasonally adjusted.
- However, house prices are showing few signs of responding to policy changes. The market continues to face a limited supply of listed property. And house price growth hit a new record high of 30% across the country.
- We still expect house price growth to cool from the second half of the year. Where sales go house prices typically follow. Fundamentally, new housing supply is coming online, and mortgage rates are expected to rise. And if all this fails, the RBNZ is willing to step in and tighten LVRs further.
Housing market activity clearly cooled in May as recent policy changes look to have taken some of the wind out investors sails. House prices appear much more stubborn. The latest REINZ data for May showed house sales dropped almost 13% when seasonally adjusted. However, sales are falling in a market where supply remains very tight. Take the median number of days to sell for instance, they fell to 28 days in May – the historical average is a whole 11 days higher. Property listings remain near multi-year lows according to realestate.co.nz. As a result, house prices appear much harder to slow than activity. House price appreciation as measured by the REINZ house price index (HPI) hit a new record high of close to 30%yoy across Aotearoa. We are forecasting peak house price growth of a little over 25%yoy in the second quarter. But based on today’s data, growth will likely peak a little above our prediction.
We still expect house price growth will ease from the second half of the year and into next year. Where sales go, house price growth tends to follow. As shown in our recent forecast note we’re picking a low of house price growth of around 1%yoy by the end of 2022. On top of recent policy changes, new housing supply is coming on stream. The current frenetic pace of house building is occurring at a time when a closed border is keeping population growth anchored. Finally, the outlook for the NZ economy has brightened. For the RBNZ this means the path toward policy normalisation is looking just that much clearer. We expect the RBNZ to start lifting the cash rate from the middle of next year. Rising mortgage rates will add a further drag on house price growth and market activity.
At a regional level, sales fell almost universally across the main centres in May. Gisborne was the only exception, up 24%. Given the small size of the East Coast market though there are often large swings in sales from month-to-month. Sales momentum has clearly slowed. Almost all regions have recorded a monthly average fall in sales over the last three months. In comparison, buoyant demand had led sales to strengthen over the six months prior – see chart below. House price growth continues to look unsustainably high in many regions. The HPI was up over 50% and 40% compared to the same month last year, in Manawatū/Whanganui and Wellington respectively. Something is clearly wrong when a 21.6% gain in Southland house prices looks ordinary. House price growth must slow. And if it doesn’t then expect the RBNZ to step in and tighten LVRs further. It’s worth noting, current annual comparisons are likely to be exaggerated by the base effects of comparing to a year ago when we were just coming out of lockdown.