The New Zealand housing market is facing pressure on a number of fronts, with house sales dropping and the value of mortgage approvals on the decline. While the housing market is notoriously difficult to predict, slowing conditions may be a reaction to the overvalued status of New Zealand property. With strong evidence the housing market has turned, the big question now is whether the correction is a temporary pause or the beginning of a new direction.
According to the latest Real Estate Institute of New Zealand (REINZ) data, national house sales are currently 12 percent lower than a year ago. The bubbling market of Auckland is almost 14 percent down from last year, with property market corrections often more obvious in already over-extended locations. Historically, house price inflation follows sales with roughly a three month lag, with monthly house values no longer rising since reaching a peak of 10 percent last December.
According to Quotable Value (QV), average property values in New Zealand are 8.2 percent higher than the same time last year, with a current real value of $471,791 compared to $436,097 a year ago. The Auckland area experienced the strongest growth in year-on-year May results at 13.1 percent. While this growth looks healthy on a year-by-year basis, however, monthly growth has all but stopped rising as house price inflation continues to ease.
In other evidence of a market slowdown, mortgage approvals are also falling across the country. In the latest data from the Reserve Bank, the number of approvals has dropped significantly, falling by 12.3 percent based on a comparison of the most recent 13 weeks of data to the same 13 weeks in the previous year. This number has been steadily falling for most of 2014, with just 4,866 approvals today compared to 6,076 a year ago. The value of approvals is also down 9.8 percent over the year, with 903 million today compared to 1,079 million a year ago.
It is a well known fact that the New Zealand housing market is overvalued relative to both incomes and rents. Restrictions on high LVR lending and interest rate hikes are two examples of deliberate measures to reduce housing inflation, and whether temporary or long term, both measures seem to be having an effect. While LVR changes didn't affect the market right away, most analysts agree their impact has been significant.
The central bank recently raised interest rates for the third time in four months, breaking step with most of the developed world when lifting rates by a quarter-percentage point to 3.25 percent. Speaking of historically high prices for New Zealand’s commodity exports, growing net migration, demand for housing, and strong business confidence, RBNZ Governor Graeme Wheeler said “It is important that inflation expectations remain contained and that interest rates return to a more neutral level.”
While housing data points to a soft correction at this stage, some analysts have started to raise the possibility of a market crash. It is equally likely, however, that the market will rebound to new highs following a slight correction, with ongoing support provided by population growth, housing shortages, and the Christchurch rebuild. The truth is probably less dramatic than either of these scenarios, with the housing market simply adjusting to measures put in place by the Reserve Bank over the last few months.