New Zealand’s economy moves differently from other economies around the world. Despite this, we often get caught up in international trends. And so it is now.
Budget stimulus through the Covid health crisis, combined with runaway house price gains, and war affecting food and oil supplies, have resulted in a conflation of conditions and the return of inflation.
The Reserve Bank in New Zealand, as with central banks in many Western countries, is tasked with controlling inflation and use two key measures to do so.
- Tightening up the supply of money, so there’s less cash flowing through the system.
- Increasing the base interest rate – the rate banks get charged to borrow before lending to consumers and businesses with a margin built-in.
Interest rates have risen, but the move to reduce the money supply is not apparent.
Higher interest rates mean it becomes more expensive to borrow, which results in less borrowing. Historically, this has had a direct impact on house prices. Already we can see that the median house price in New Zealand has dropped, and combined with changes to lending rules, we are now experiencing a market where there are more houses for sale and fewer buyers.
Those who have owned their home for a while will have lived through periods of higher interest rates, so they know how this works. The trouble lies with first home buyers who have just entered the market. The value of their home may have dropped below what they bought it for, with no prospect for an increase for a couple of years at least. The good news for this group is that recent changes to lending rules meant their loan application was stress-tested at 6%, so they can afford to ride out the storm.
What the experts have to say
According to The Reserve Bank’s forecast, house prices will settle another five percentage points lower across the country, with some speculation that Auckland and Wellington may have reached their bottom already. Furthermore, financial markets now indicate that inflation is under control and interest rates will drop. If this is indeed the case, then with lower mortgage rates, a rapid increase in migration and a freeze of new housing infrastructure investment, there is a high chance that we will see a strong bounce-back in house prices post-election 2023 and into the summer of 2024.