New Zealand housing prices post first annual drop in 11 years as mortgage rates surge

Economists are predicting New Zealand house prices will fall about 13 per cent this year and decline further in 2023. PHOTO: PEXELS

WELLINGTON – New Zealand house prices suffered their first annual decline in more than 11 years in October as surging home loan interest rates discouraged buyers.

Prices fell 0.6 per cent from a year earlier, the first year-on-year drop since June 2011, CoreLogic New Zealand said on Wednesday in Wellington. Values fell for a seventh consecutive month, sliding 1.3 per cent from September.

“Stretched affordability is constraining the ability and willingness of all buyers to get or extend a mortgage,” said CoreLogic research head Nick Goodall. “This all leads to reduced demand and contributes to falling prices.”

The Reserve Bank of New Zealand (RBNZ) has increased the official cash rate by 3.25 percentage points to 3.5 per cent over the past year, and some economists forecast the benchmark could go to 5 per cent or higher in 2023. Trading banks have lifted home loan interest rates to match the aggressive tightening cycle, and CoreLogic expects mortgage interest rates to keep rising.

Mr Goodall said the variable interest rate averaged 7.1 per cent at the end of October, but at least one main bank uses an 8 per cent assumption to test whether a customer can service a loan, and that test rate could rise to 8.5 per cent if the official cash rate climbs even higher next year. 

Economists are predicting house prices will fall about 13 per cent this year and decline further in 2023, with a peak-to-trough slump in the market of 18 per cent to 20 per cent forecast.

RBNZ said on Wednesday that the country’s financial system is as a whole resilient, but global financial stress will test this.

“The rising global interest rates necessary to curb inflation will test New Zealand’s financial resilience,” governor Adrian Orr said in the bank’s financial stability review, which is released twice a year.

“While our financial system as a whole is resilient, some households and businesses will be challenged by the rising interest rate environment,” he added.

The RBNZ said there are increasing downside risks to the global economic outlook and despite New Zealand’s high levels of employment and a sound government fiscal position, the country is not immune to these risks.

The central bank, however, said house prices remain above their sustainable level, and that a further gradual decline would be positive for long-term financial stability.

However, it added that a small number of recent buyers are in negative equity, and this will continue to grow if prices continue to fall.

“With widespread negative equity, banks would be more at risk of losses if people can no longer afford their mortgage, for example if they lose their job,” the RBNZ said. BLOOMBERG, REUTERS

Follow ST on LinkedIn and stay updated on the latest career news, insights and more.