Property lawyers need little reminding of the impact on their business from declining sale volumes and property prices up to, and including, the first half of 2023. But by year’s end, REINZ figures were confirming an increase in sales and listings, rising prices and fewer days to sell.
Cautious optimism had returned to the property market after a slow and steady improvement in market conditions during the second half of last year.
However, there has generally been a decline in property prices across New Zealand since the market peaked at the end of 2021 and into early 2022. This decline continued until it bottomed around May 2023 and was followed by slow upward price movement from around July 2023. In addition, residential property sales in New Zealand peaked around June 2021 and bottomed around May 2023, representing a similar trend.
The situation has varied slightly across regions, with some areas experiencing sharper price declines or more modest recoveries, but by the end of 2023 the property market was showing signs of recovery. While there has been some improvement in market conditions, there is still some way to go before prices return to their 2021/2022 peak, and the market is notoriously difficult to predict.
Cause and effect
While there is no single specific cause for the recent uptick, various economic, political and social factors have contributed.
Surprisingly, despite fears of a property market crash in response to the covid-19 pandemic, average sale prices increased through to the market peak in 2021/2022. This occurred despite the uncertainty of the pandemic, recession fears and a decline in economic growth. Differing views exist as to what caused this unusual price inflation, such as insufficient housing supply, the lack of a capital gains tax, increased housing demand due to New Zealanders returning home, the Reserve Bank’s cuts to the Official Cash Rate (OCR) and the mortgage loan-to-value ratio restrictions being removed in early 2020.
The property market is sensitive to interest rate fluctuations, and the Reserve Bank’s reductions to the OCR and the interest rate falls, coupled with more relaxed mortgage-lending policies, undoubtedly contributed to the rise in property prices during the pandemic. Low interest rates meant home loans became cheaper and many buyers entered the property market with low-cost finance, despite the increased demand pushing up property prices.
However, post-pandemic, the effect of low interest rates caused inflation to soar above the Reserve Bank’s target of 1% to 3%. The economy overheated, with demand outstripping supply, the labour market tightened, and international supply chains were disrupted. Inflation peaked at just over 7% in June 2022, and in October 2021, in a bid to combat rising inflation and slow the economy, the Reserve Bank began tightening monetary policy and introduced a phased series of OCR hikes which lasted almost two years until it was finally stabilised in October 2023.
With increased interest rates from October 2021 came steadily higher borrowing costs, making it increasingly expensive for buyers to service a home loan. This ultimately led to a drop in demand for residential property, causing a drop in sales followed by a decline in price. Many homeowners on fixed-term mortgages came under financial pressure as they were forced to re-finance their home loans from historically low interest rates to the markedly increased rates borrowers are still experiencing. The full impact of rate hikes on the property market remains to be seen as more and more New Zealanders come off fixed-term mortgages and are faced with large cost increases to service their debt.
However, it has not only been buyers and sellers who have been impacted. The property market is a core component of New Zealand’s economy and many businesses within the industry have been affected by the market conditions. For example, many property lawyers across New Zealand have reported considerable reductions in transactional property work and there has been a similar situation for mortgage brokers and real estate agents.
What to expect
At the beginning of 2024, inflation remains high but the rate of inflation is falling and it is predicted to fall further in response to the Reserve Bank’s monetary policy measures. Once inflation is under control and headed towards the Reserve Bank’s target, it should prompt the bank to consider reducing the OCR. This, in turn, could see lenders’ interest rates fall, making it cheaper and easier for buyers to obtain finance and enter the property market.
When the change will occur and how low interest rates will go is difficult to predict. It will be informed by various economic, political and social factors over the coming year.
In addition to the influence of interest rates, the property market will likely be affected by other aspects such as the amount of net immigration into New Zealand (a whopping 134,000 for the year ending October 2023) and its subsequent impact on the demand for housing. There will also be the effect of the coalition government’s approach to housing policy and any reduction to the bright-line test period (a reduction from 10 years to two is slated to come into effect from July this year). Property investors are expected to look more favourably at the market if the government revisits the present constraints of the bright-line test and continues the staged return of mortgage interest deductibility for investors.
All markets dislike uncertainty. During the past year, there has been considerable uncertainty as to how high inflation would go and what interest rates would do. Now that some certainty is returning to the property market, buyers and sellers seem to be gaining confidence. That also includes higher-net-worth buyers, who do not require finance to purchase and have been waiting and watching for property prices to bottom.
While factors like interest rates continue to impact the market, it appears to be buoyed to some extent by signs that property prices have stabilised and the lack of further OCR hikes. While no one knows exactly what the property market will do, if history is anything to go by, the long-term trend in New Zealand has been onwards and upwards.
Dan Conway is the professional services manager at The Law Association.
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