Property values across NZ continued to fall in May, down 0.7 per cent, but the annual rate of change has eased, providing tentative evidence the current downturn is winding up.

Nationally, average values are 10.2 per cent lower than the same month last year and $121,000 below their peak, but still $194,000 higher than the pre-Covid level (March 2020) with the annual rate of change easing slightly from -10.3 per cent in April.

CoreLogic NZ Head of Research, Nick Goodall says various indicators such as moderating house price falls and the latest RBNZ forecasts for the Official Cash Rate, which is expected to have now peaked, were positive signs for home owners.

'While the OCR is at a relatively high level of 5.5 per cent following a total increase of 525 basis points over the last 20 months, this expected ceiling for interest rates reinforces our view that a possible floor in prices is approaching.

'This has been an exceptionally fast and impactful monetary policy tightening cycle and the RBNZ has effectively said now is the time to pause, and wait and see how this plays out, as mortgage holders continue to adjust to increased mortgage payments, reducing spending elsewhere in the economy.”

Nick suggests a peak in the cash rate, at least in the short term, will help provide a bit more comfort and certainty to the borrowers of almost 50 per cent of existing loans by value, who are part of the refinancing wave due to roll off current interest terms within the next year.

'Mortgage holders and aspiring home owners should now be able to quantify the worst-case scenario for their mortgage repayments which will give both them and their bank confidence in assessing serviceability test rates.”

Additionally, while NZ credit bureau Centrix has observed a lift in mortgage arrears to 1.31 per cent in March, up from the recent low of 0.94 per cent at the end of 2021, the NZ Bankers Association reported at the end of 2022 almost 45 per cent of mortgage holders were ahead on their repayments.

This is consistent with estimates from mortgage advisors that through the period of falling interest rates, roughly half of all borrowers opted to keep their repayments at the same level as their old schedule when refixing at lower rates.

'It seems the majority of borrowers are well placed to adjust to the higher repayments likely due to growth in wages and reduced spending elsewhere.

'More vulnerable sectors are likely to include first home buyers who purchased around the peak of the cycle who haven't had the benefit of time to accrue equity in their home or a savings buffer, along with lower income households where balance sheets are likely to be more thinly stretched.”

Value falls in Tauranga accelerated over the month (-2.3 per cent), while in Dunedin it was the second month in a row with very little or no change (0.0 per cent in May and -0.1 per cent in April). Despite signs of moderation across parts of the country, all main centres have still fallen at least 1.9 per cent over the past three months, including Christchurch which has generally been more insulated from significant falls in value in this cycle.

Over the past year, most main centres saw a reduction in the rate of decline, excluding Christchurch (-4.3 per cent, from -3.6 per cent in April) and Tauranga (-13.2 per cent, from -11.4 per cent in April).

The average property value in Tauranga has almost fallen below $1 million, at $1.02 million. Another fall of 2.2 per cent or more would take it below the seven-figure benchmark.

The average value in the wider Wellington area fell below $1 million in September 2022 and has now dropped to under $900,000 – a level not seen since January 2021, wiping out potential gains for anyone who bought in the past 27 months.

The Wellington area remains the worst performing market when compared to the recent peak (21.3 per cent down), however, signs of stabilisation are now under threat as the rate of decline accelerates again.

'Perhaps the inconsistencies of the Upper Hutt market perfectly encapsulate a market trying to find its feet, with a quarter of peak value now wiped out. The encouraging sign in April of a 0.1 per cent increase has now been superseded by a 2.5 per cent fall in May, quashing suggestions that market has bottomed,” says Nick.

'Similarly, Wellington City values fell back into the negatives (-0.7 per cent) after a minor lift in April. Like Tauranga, the average value has fallen closer to $1 million, sitting at $1.02 million at the end of May.”

However over three months both Lower Hutt (-1.0 per cent) and Wellington City (-1.6 per cent) have seen a genuine moderation in falls compared to Upper Hutt (-5.3 per cent) and Kāpiti Coast (-4.9 per cent).

Franklin is a part of Auckland which has performed very differently to the rest of the Super City.

Nick says this could be due to the relative affordability of the area, along with lifestyle preference with an increasing share of next home owners picking up property here.

'Values in Franklin are 4.5 per cent higher over the last three months and ‘only' -8.2 per cent down over the last year. Similarly, Auckland City has seen values fall -8.0 per cent over the last year, and are essentially flat (-0.1 per cent) over the last three months.

'Meanwhile, the rest of Auckland generally saw values fall by around -1 per cent over the month, with the exception of Rodney, where average vales dipped -1.9 per cent. Interestingly, Papakura, the most affordable part of Auckland, has fallen the furthest over the past three months (-5.8 per cent) and -17.5 per cent over 12 months. It's possible an over investment in new developments could be driving the larger falls.”

Regional House Price Index results

The NZ property market is comprised of many micro-markets and this becomes very clear when analysing the other main urban areas across the country, says Nick.

'Queenstown's remarkable defiance in the face of the broader downturn is certainly a point of interest, while on a much more reduced scale Invercargill's market has also held up relatively well, down ‘only' 5.9 oer cent in the past year and 7.3 per cent below the peak value of $482,000.

'At the other end of the scale, Napier and Palmerston North are roughly 14 per cent down in the last year and Gisborne's average value (-11.6 per cent) has now dropped under $600,000.”

Other than Queenstown, Whanganui is the only other city to see values increase over the past three months – the lower average value perhaps attractive for prospective buyers on the hunt for value for money and/or decent yield, which at an average of 4.6 per cemt (gross yield) is one of the highest in the country, says Nick.

Property market outlook

As evidence mounts that NZ's housing market is approaching a trough increased consideration is now being given to what happens next here.

'Amid a stabilisation in the cash rate, slightly loosened loan-to-value ratio limits, reduced supply with fewer people listing their property for sale, strong net migration and a positive turn in Australia's housing market, there's confidence that the bottom is approaching,” says NIck.

'Affordability, hindered by high prices and contractionary monetary policy will likely keep a lid on demand for the foreseeable future. More than 50 per cent of the average income is required to service an 80 per cent LVR mortgage in Aotearoa compared to 43 per cent in Australia and if property values and interest rates now start to plateau, this is unlikely to improve.”

Anticipation of a National-led Government could bring some investors out of the woodwork sooner rather than later, while a similar concern about the very likely introduction of debt-to-income limits in early 2024 could also encourage determined investors to get in prior.

However, Nick says the property investment landscape has changed, with the phased removal of interest deductibility impacting profits, increased regulation favouring tenants and land supply reform potentially impacting the appetite for property investment.

'Indeed, there appears to have been a change in investor behaviour due to the interest deductibility exemption for new builds. During the first quarter of this year, 34 per cent of settled new builds went to mortgaged investors, while only 19 per cent of existing properties went to the same group.

'After years of relative consistency between these two property types, the diversion appeared from Q1 2021, when the share was 28 per cent for both. For properties acquired before March 27, 2021, interest deductibility is being phased out over a four-year period, for properties acquired after March 27, 2021. any interest incurred (from October 1, 2021) will no longer be deductable.”

Download the latest House Price Index