New Zealand’s property market is expected to see a rebound in house prices next year, driven by ongoing supply shortages and the possibility of interest rate cuts, according to a recent Reuters poll of property market analysts.
The housing market experienced a boom during the pandemic, resulting in a significant increase in prices. However, a tightening cycle by the Reserve Bank of New Zealand (RBNZ) helped cool down the market. Now, with demand returning and limited supply, house prices are projected to rise again, albeit at a slower pace.
Rising Prices in 2024
The tightening cycle by the RBNZ, which lasted for 20 months, saw the overnight cash rate increase from near-zero to 5.50%. This campaign had a significant impact on house prices, resulting in a 15% decrease compared to the peak in November 2021. While this correction was less than what analysts originally predicted, it still helped to bring prices down after the rapid rise in the previous months.
The latest Reuters poll, conducted between August 14-28, showed that New Zealand house prices were expected to decline by 4.8% this year. This decline estimate was much lower than the 8.0% fall forecasted in a previous poll conducted in May. Analysts believe that the decline is a result of returning demand meeting limited supply.
Looking ahead, the poll suggests that average property prices are expected to rise by 5.0% and 6.0% in 2024 and 2025, respectively. These figures indicate an upgrade from the previous poll, which projected increases of 3.4% and 5.0% for the same years. However, experts remain cautious about a potential return to a “fear of missing out” (FOMO) state in the housing market, believing that the impact of higher interest rates and economic challenges will dampen the pace of price growth in the future.
Senior economist Miles Workman from ANZ suggests that as we move into 2024, higher-for-longer interest rates coupled with stretched affordability and rising unemployment may lead to a subdued pace of expansion in house prices. This perspective aligns with a recent Reuters poll of economists, which predicted that the RBNZ has finished raising the overnight cash rate and will keep it unchanged at 5.50% until early next year, eventually lowering it to 4.50% by the end of the year.
While lower interest rates may provide some relief to homebuyers, their impact on the affordability of properties among first-time homebuyers remains uncertain. When asked about affordability, there was an even split among the 11 analysts surveyed, with six stating that affordability would improve over the next year and five believing it would worsen.
The International Monetary Fund (IMF) stated that house prices could stabilize in the coming year, but affordability would continue to be a concern due to high mortgage rates and low supply. This indicates that despite the decline in prices, potential buyers may still face challenges in entering the market.
For those considering renting instead of buying, the outlook is not much better. Of the 11 analysts who answered a separate question, only one believed that average rents would fall slightly. The remaining analysts either predicted a slight increase or a significant increase in average rents for the rest of 2023.
Conclusion
The property market in New Zealand is expected to experience a rebound in house prices next year, driven by ongoing supply shortages and the possibility of interest rate cuts. However, the pace of price growth is projected to be more subdued compared to the recent boom experienced during the pandemic.
Economic challenges, higher interest rates, and stretched affordability may limit the expansion of house prices in the future. It remains to be seen how these factors will impact the affordability of properties for first-time homebuyers. Additionally, rental prices are expected to continue their upward trajectory, posing challenges for those considering renting instead of buying. As always, potential investors should carefully analyze the market and consult with experts before making any property investment decisions.