Sally Lindsay
One of the country’s most prominent mortgage brokers estimates residential property owners have lost about $570 billion in real wealth since the market peaked in November 2021.
John Bolton
John Bolton, the founder of Squirrel Mortgages, says while most people understand that the property market has had a rough couple of years, few seem to grasp the severity of the housing correction in real terms because they have failed to factor in the role of inflation.
Since their peak, residential property prices have fallen by about 21% in Auckland and 25% in Wellington. Nationally, the median price sits roughly 17% to 18% lower, hovering between $795,000 and $808,000 early this year.
“This is a massive fall by any measure, but it still understates the damage,” Bolton says. “The erosion of property wealth needs to [include] what’s happened to the purchasing power of money over the same period.”
That’s where inflation comes in.
Bolton calculates that cumulative inflation from the late-2021 house price peaks to the end of 2025 was between 19% and 20%. This needs to be combined with the drop in house prices to calculate the fall in real purchasing power.
In Wellington, this equates to a decline in real purchasing power of between 37% and 38% and between 33% and 34% in Auckland.
“A Wellington homeowner who bought at the peak and sells today hasn’t just received 25% less than they paid. The money they get back buys nearly a fifth less than it would have in 2021,” he says.
While it’s only a “paper loss” until or unless it is crystallised, and the market peak in 2021 was only fleeting, this evaporation of “paper” wealth is still real, as is its impact on people’s behaviour, Bolton says.
“This is why the broader economy is struggling to get out of first gear. It’s the exact opposite of the wealth effect we saw during the boom.
“In 2021, everyone felt rich on paper, so they went out and spent up large. That wasn’t a new thing. For decades, homeowners borrowed and spent, with total home loan debt growing from $65b in 2000 to $335b in late 2021. That is annualised debt growth of more than 8% per year for two decades. Now homeowners feel decidedly poorer,” he said.
“Even if homeowners didn’t sell their house at the peak, knowing they’ve lost that much in real equity snaps their wallets shut. When a collective $570b of paper wealth vanishes, consumer confidence and spending dries up.”
The calculation
The total value of New Zealand’s housing market doesn’t look too disastrous on paper, Bolton says, because tens of thousands of new homes have been built since 2021, artificially propping up the total pool of housing stock.
If these new-builds are stripped out, New Zealand’s housing stock was worth $1.72 trillion in 2021.
To maintain the purchasing power homeowners enjoyed in 2021, the value of those homes needed to grow by the cumulative inflation rate.
“Because values fell instead, the ‘real wealth’ loss on those physical houses is a staggering $630b,” Bolton says.
On the other side of the ledger – the mortgage – inflation eats not only the real value of a house but also the real value of debt.
Bolton says in late 2021, Kiwis were sitting on roughly $335b in residential mortgages. During the past four years, inflation has effectively eroded about $65b of the real economic burden on that debt.
That’s a win for the borrower.
Subtracting this $65b from the $630b loss in real value produces the net real wealth loss of $570b.
“That is how much purchasing power has simply evaporated from existing homeowners,” Bolton says.
Few buyers
Bolton says with falls of this magnitude, why hasn’t there been a wave of distressed sales and mortgage defaults?
The answer lies in who bought at the peak – and how few buyers there really were.
The mania in late 2021 was extraordinary, but it was brief, he says, and the cohort of buyers who transacted at or near peak prices was small relative to the total number of homeowners.
The vast majority bought well before the 2020–2021 surge and still sit on substantial equity.
The other circuit breaker has been the labour market. Unemployment has risen, but not to levels that trigger mass forced selling and most mortgage holders have been able to service their debt.
“Expensively, yes, but serviceable,” Bolton says. “The real loss has been those forced to meet the market and those have largely been relationship breakdowns.”
The recovery and Iran
The recovery was always going to be long and unexciting, he says.
Bank economists had been forecasting nominal house price growth of between 2% and 5% this year but the war in Iran and the subsequent hike in oil prices has put paid to that.
“For New Zealand’s housing market, the timing could hardly be worse.”
BNZ chief economist Mike Jones has warned inflation-adjusted house prices could fall back to late 2016 levels, 30% below their 2021 peak.
The lengthening conflict in the Middle East has prompted the BNZ to rework its macro forecasts. Jones says the country is now looking at a weaker economy, higher inflation, a delayed labour market recovery and slightly higher mortgage rates.
The implications for housing demand are negative overall. “We’ve consequently pruned our house price inflation projection to flat for this calendar year, from a 2% hike previously, Jones says.
The BNZ’s forecasts may yet prove optimistic.
“But if they’re in the ballpark, spiking inflation will still see real or inflation-adjusted house prices fall through to about mid-2027.
Interest rates
On the mortgage interest rate front, BNZ’s economists expect the Reserve Bank to hike the OCR twice in the second half of this year.
“We now see inflation rising to a peak of 4.3% year-on-year in the second quarter, and remaining above 3% for the rest of the year.”
While the oil price shock is hoped and assumed to be temporary, the BNZ continues to forecast a 0.25% lift in the OCR in September and another in December.
Based on the BNZ’s OCR outlook, Jones expects floating rates to start rising in about the third quarter, finishing the year in a higher 6% to 6.5% range.
Longer-term interest rates are already rising.
Since the war began, the three-year swap rate has jumped from 3.19% to 3.93%, Bolton says.
“When swap rates jump, the cost for banks to borrow money jumps, and that heavily dictates what mortgage holders end up paying on their fixed rates.”
Recovery delayed
Bolton says the most likely outcome is that any meaningful housing recovery is now delayed until 2027 at the earliest.
The ASB’s latest economic note says Kiwi households face a cost-of-living hike of about $55 a week this year in the wake of the oil price shock.
“The actual impact on household balance sheets is likely to be greater as the impact of sharply higher fuel prices seeps into other goods and services households’ purchase,” Yen Nguyen, an ASB economist, says.
With little in the way of housing capital growth being recorded, he says the “wealth effect” from property has been negligible and one of the reasons consumption has been reasonably slow to respond to OCR cuts.
“The fuel price shock has injected a large degree of uncertainty into the outlook for the economy and, as a result, risks further subduing the housing market.
“Should house prices fall or house sales slow amid the uncertainty, we expect this will be a drag on consumer spending.”
The ASB is expecting the first OCR hike in December.
Recessions don’t last
It’s not all doom and gloom, Bolton says.
“Recessions don’t last forever. The fundamentals that underpin a recovery – improved economics, immigration, pent-up first-home buyer demand, people needing to move and falling inventory – remain intact.”
But when the economy eventually recovers, housing won’t flop back to the good ol’ days, he says.
“This time there will be more muted house price growth. It’s has been long overdue.”
The government has done much to ensure supply keeps pace with demand, from regulatory reform, to parallel importing of building materials and the release of land supply.
“That’s a good thing long term, but doesn’t change how hard it feels for homeowners today.”
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