After one of the most dramatic housing booms in New Zealand's history, the market has now spent more than three years largely moving sideways. While many homeowners continue to wait for prices to recover to their 2021 highs, economists argue there is another side to the story: housing affordability has improved significantly.
Report by elocal
After one of the most dramatic housing booms in New Zealand's history, the market has now spent more than three years largely moving sideways. While many homeowners continue to wait for prices to recover to their 2021 highs, economists argue there is another side to the story: housing affordability has improved significantly.
A detailed analysis by BNZ Chief Economist Mike Jones examines where the housing market stands today, how today's prices compare with previous downturns, and whether New Zealand homes remain expensive by international standards.
The report also highlights a growing divergence between regional markets, with Auckland and Wellington continuing to underperform while several South Island regions have already reached fresh record highs.
Housing Market Has Been Flat Since 2023
There’s been a bit of attention recently, including in the global media, on the length and breadth of NZ’s house price downturn.
So, we thought we’d add some context. How long, how deep, how widespread, and how house prices now stack up relative to inflation, rents, incomes, and the rest of the world.
First, some housekeeping. There are several house price measures reported in NZ, which can cause confusion. We use the REINZ House Price Index (HPI). It’s timely and adjusts for compositional changes in house sales. Where a dollar value is required, we sub in the REINZ median house price measure.
The chart plots the recent history of the HPI. After soaring 43 percent in the 18 months from May 2020 to November 2021, prices fell 16 percent down the other side. That period of falling house prices ended just over three years ago in the autumn of 2023. Prices have gone broadly sideways since.
REINZ House Price Index. Source: Newsroom / BNZ
Lining up the post-2021 adjustment with the four other periods of house price decline we’ve seen since 1992 reveals it as the largest. The necessary context is that the 2021-2023 declines were immediately preceded by the largest house price boom since the 1970s. Boom, bust.
Historical comparison of New Zealand housing corrections. Source: Newsroom / BNZ
In the wake of the 2007 Global Financial Crisis correction, it took house prices 63 months to reclaim their previous peak. We’re 55 months into the current cycle, still 15 percent shy of the 2021 peak, with prices showing few signs of lift.
It’s important to recognise that this conclusion does not hold everywhere. Average house prices in Canterbury, Otago, and Southland have clawed back all of their modest losses recorded through 2022/23 and have thus made new highs. Prices in all other regions remain below the 2021 peaks, particularly Auckland (-22 percent) and Wellington (-26 percent).
Regional house price changes since the 2021 peak. Source: Newsroom / BNZ
House Price Pain = Affordability Gain
The flipside of flat or falling house prices has been a material improvement in housing affordability.
There are many ways this concept can be measured. Our proxy combines the cost of an average (20 percent) house deposit with the first year of debt servicing payments and expresses those outgoings as a multiple of the average household income. The resulting index clearly won’t reflect all situations but provides a reasonable indication of affordability trends.
BNZ Housing Affordability Index. Source: Newsroom / BNZ
From a starting position of severe unaffordability in 2021, the average size of a deposit has reduced as house prices have come down, incomes have increased, and mortgage rates have been on an up-then-down round trip.
According to our index, the net of these factors has returned housing affordability to levels that last prevailed in mid-2020. That doesn’t necessarily imply houses are suddenly affordable outright, just that the overall situation has improved in recent years.
Moreover, our forecasts for house prices, income growth, and mortgage rates combine to hint at further small improvements in the affordability index ahead.
A Larger 'Real' Decline
When comparing house prices over long periods and across countries, it’s more useful to look at inflation-adjusted or real house prices. A house has not gained in ‘value’ if its price rises 5 percent in a year in which inflation is 7 percent.
Real NZ house prices have fallen back to where they were in mid-2019, 28 percent below the 2021 peak. Auckland and Wellington have experienced the largest real declines, at 35 percent and 40 percent below their respective peaks. No region – not even Southland – has seen real house prices eclipse 2021 levels.
Global Comparisons
So, does the recent sluggish period for the housing market mean prices are now getting ‘low’?
It’s always a tricky one. No one measure (or economist) will give you a straight answer. But checking in on a few simple valuation metrics, pulling in some global comparisons, can at least provide a general steer.
House price cycles in the US, UK, Australia, Canada and NZ tend to exhibit a reasonable degree of synchronicity. It’s nonetheless clear enough that the housing markets of the UK, US, and particularly Australia have outperformed NZ over the past five years.
Viewed in isolation, that might steer some towards the conclusion that some NZ catch-up is due. However, the degree of real NZ house price outperformance in the years prior, including and especially the Covid period, still puts NZ at the upper end of real house price gains since 2010.
In the chart, we’ve rebased price indices to 2010. The relative rankings are naturally sensitive to the selection of this date. But we note the above conclusion broadly holds when flexing this assumption.
Inflation-adjusted international house price comparison. Source: Newsroom / BNZ
House Prices Compared With Rents And Incomes
We can also check in on house price-to-income and house price-to-rent ratios. They’re commonly used metrics that assess the level of house prices relative to some sense of fundamentals. We’re quick to point out that house prices, like any asset price, can and often do diverge from fundamentals for long periods of time.
In comparing these measures with global peers, we need to add the caveats that getting like-for-like data can be difficult, and some housing markets may oscillate around structurally different long-run trends in these ratios.
With these duly noted, NZ lines up as having a relatively high house price-to-rent ratio relative to the US, UK, and Australia. That’s despite a sharp fall in recent years.
International comparison of house price-to-rent ratios. Source: Newsroom / BNZ
In contrast, comparing house prices to incomes across peer countries since 2010 shows NZ as more mid-pack. Again, the selection of the base year is important here (we’ve gone with 2010 again).
What’s clear is that NZ’s house price-to-income index (courtesy of the OECD) has seen a larger retrenchment from 2021 extremes than the peer countries plotted, returning it to levels last seen in 2015.
International comparison of house price-to-income ratios. Source: Newsroom / BNZ
What Do We Take From All This?
Drawing firm conclusions from any sort of global house price comparison or valuation computation is fraught with difficulty. But the ones we’ve looked at give the sense that, despite some retrenchment in recent years, NZ is still middling-to-elevated looking back over a longer time period.
Notably, the Reserve Bank’s modelling also puts current house prices above its indicator range of ‘sustainable’ prices, albeit much less so than previously.
None of this implies house prices need to fall further or can’t lift from here. House prices are cyclical in nature and the 2020/21 boom is evidence enough that upswings can take hold despite a stretched starting position if macro settings are supportive (interest rates, government policy, the labour market, and supply dynamics).
Equally though, the analysis here provides no impediment to the recent period of flattish house prices continuing. It supports our sense there’s downside risk on our house price inflation forecasts for this (calendar) year (0 percent) and next (+4.5 percent).
eLocal Analysis
The BNZ analysis paints a picture of a housing market that has undergone a significant correction without experiencing a dramatic collapse. Nationally, prices have stabilised after giving back much of the extraordinary gains recorded during the pandemic boom, while affordability has gradually improved as incomes have risen and interest rates have eased from their peaks.
However, the report also highlights an increasingly uneven market. Auckland and Wellington continue to lag well behind their 2021 highs, whereas parts of Canterbury, Otago and Southland have already established new record prices. That regional divergence suggests future housing performance may depend less on national trends and increasingly on local economic conditions, migration patterns and housing supply.
From an international perspective, New Zealand housing remains relatively expensive despite recent declines. While affordability has improved, the country's house price-to-rent ratios remain elevated compared with several comparable economies, suggesting the market has yet to fully return to long-term historical norms.
For prospective buyers, the current period of price stability may provide greater certainty than the highly volatile conditions experienced between 2020 and 2022. For existing homeowners and investors, however, expectations of rapid capital gains may need to be tempered unless economic conditions become considerably more supportive.
Source
Original analysis: Mike Jones, Chief Economist, BNZ
Originally published by Newsroom https://newsroom.co.nz/
Disclaimer: This publication contains analysis originally prepared by BNZ Chief Economist Mike Jones. The original article includes the full BNZ financial disclaimer and should be read in conjunction with that advice.