Roller Coaster like Auckland House Prices
The Auckland housing market experienced significant fluctuations during the pandemic period. Before the pandemic, it fluctuated around 3000, sharply rising to above 4500, then plummeting to approximately 3500. Currently, it is stable at about 3500. The latest REINZ announcement in February 2024 revealed a house price index of 3481. What are the causes of this roller coaster?
House prices at a crossroad
However, due to changes in economic data and expected interest rates, the future fluctuations in house prices are at a crossroad. There are reports adjusting predictions for house price changes.
There are a lot of moving parts in the market right now. | Catherine Masters (29 Mar 2024)
At its last meeting the Reserve Bank held the Official Cash Rate (OCR) at 5.5% and is now predicting house prices will rise around 3.4% this year.
And last week figures from Stats NZ showed the economy had slid back into a recession in the fourth quarter of last year.
Miles Workman, senior economist with the ANZ, said there were a lot of moving parts in the housing market with macroeconomic forces, such as high net migration, at play on top of the Government’s policy changes and the data was “evolving”.
Potential Causes
Below are some commonly used explanations and data:
- Economic growth data — Quarterly GDP changes
- Unemployment rate data
- Housing supply data
- Mortgage rates and inflation data
- Migration data
- Other policies
Technical Recession — GDP Negative for Two Consecutive Quarters
New Zealand has once again entered a technical recession, with consecutive quarterly declines in the third and fourth quarters of 2023, at -0.3% and -0.1% respectively. In fact, the fourth quarter of 2022 and the first quarter of 2023 also saw two consecutive quarters of negative growth, reflecting a double dip recession and very weak economy in New Zealand. An economic recession usually have negative impact on house prices.
2. Unemployment Rate
Unemployment has been rising since 2022 but it remains at a low level of about 4%. Both the GDP and unemployment rate are suggesting less demand on housing.
3. Increase in Housing Supply
The commonly used housing supply data in New Zealand is Building Consents — New Dwellings Consented. Statistics updated until January 2024 (https://www.stats.govt.nz/information-releases/building-consents-issued-january-2024/). Over an extended period, the average monthly supply has been around 2000 units, but it dropped below 1000 units during 2009–2010, hitting a historical low of only 812 units in January 2009. Since 2011, it has been consistently rising, reaching a historical peak of 5,303 units in March 2022, and then falling back to the previous average. In January 2024, there were 1,991 units.
4a. Mortgage Interest Rates
The commonly used mortgage interest rate data in New Zealand is the New Residential Mortgage Standard Interest Rate. Central bank data is updated until February 2024 (https://www.rbnz.govt.nz/statistics/series/exchange-and-interest-rates/new-residential-mortgage-standard-interest-rates). Before the international financial crisis, the mortgage rate had risen to over 10%, then substantially decreased to 6% in 2008. With the outbreak of the pandemic, the central bank again significantly reduced interest rates, with the 2-year fixed mortgage rate dropping to 3.47%. Rates began to rise in 2022, with the latest figure for February 2024 reaching 7.45%, but remaining stable.
The central bank predicts that interest rates will start to decline as early as the second half of 2024, with a potential reduction of 1.5% by 2026 (Figure below)
4b. Inflation Rate
New Zealand’s inflation data is measured by the Consumer Price Index year on year (CPI yoy). Statistics are updated until the fourth quarter of 2023 (https://www.stats.govt.nz/news/annual-inflation-at-4-7-percent/#:~:text=Annual%20inflation%20at%204.7%20percent%20%7C%20Stats%20NZ). In the fourth quarter of 2015, it dropped to 0.1%. With the outbreak of the pandemic, inflation rose again, with a sharp increase to 7.3% in the second quarter of 2022, reaching near-year highs, and then declining. The latest figure for the fourth quarter of 2023 has fallen back to 4.7%.
5. Net Migration
New Zealand’s population migration data is measured by Estimated migration by direction, rolling year ended. Statistics are updated until January 2024 (https://www.stats.govt.nz/topics/migration). Before the outbreak of the pandemic, in March 2020, net migration rose to 91,680 people. After the pandemic outbreak and border closures, emigration exceeded immigration, leading to a decline in net migration to -20,093 people in February 2022. However, with the reopening of borders, immigration rapidly increased. The latest figure for January 2024 shows immigration reaching as high as 257,159 people, while emigration is also high at 123,324 people. The net migration remains positive at 133,835 people, higher than pre-pandemic levels, leading to predictions of rising house prices.”
6. Other Policies
Over the past six years, the Labour Party has made several changes to housing policies, including restrictions on foreign property purchases (Overseas Investment Act 2018) and the bright-line property rule. However, in this year’s election, the new government is pushing for changes to these policies. The direction is likely to reduce intervention and shift towards increasing investment attractiveness. Interested readers can search for more information online.
Conclusions
High interest rates have led a double dip technical recessions, GDP and unemployment rates imply lower house demands. However, the expectation of mortgage rate cut and lower inflation rate are expecting a price hike. How would other policies changes and house supply affect the market dynamics?
