23 Jul 2021

Housing market slows, but prices unlikely to drop - CoreLogic

6:52 am on 23 July 2021

The housing market is at a turning point with sales activity and price growth expected to peak in the coming months, if they haven't already.

Houses around Lyttelton area in Christchurch

File photo. Photo: RNZ / Nate McKinnon

CoreLogic's Property Market and Economic Update for the second quarter ended in June found the residential property market was losing momentum.

After a hot start to the year, sales have fallen back to levels last seen in 2019 with fewer properties on the market while house price growth lost pace, falling from 3.1 percent in April, to 2.2 percent in May and to 1.8 percent for June.

"As sales activity dips over the months it's also likely that a slowdown for values will become more evident, although house price falls still seem unlikely in this cycle," CoreLogic chief economist Kelvin Davidson said.

The slowdown in prices was largely due to affordability pressures, but also because of the 40 percent deposit requirement and extended bright-line test for investors, as well as the tightening of interest deductibility rules and the Reserve Bank's plan to look at debt-to-income restrictions.

In the near term, the report says the market was likely to be affected by tighter monetary policies, with many experts forecasting the RBNZ would raise the official cash rate in August, after it halted its bond buying programme last week.

In anticipation, the major banks had begun raising their fixed-term mortgage interest rates ahead of any decision by the Reserve Bank.

Davidson said this would affect new borrowers.

For example, a 36 basis point increase in a 2.95 percent interest rate would require additional payments of $1824 per year on recently issued $800,000 mortgage, he said.

If retail interest rates rise to their long average of 6 percent, that same mortgage would cost and extra $19,000 a year in repayments.

"Those who have entered the housing market since 2014, the last time the OCR increased, have only experienced low interest rates so the effects of a pattern of increases will likely come as a shock to many of those with a hefty mortgage, which includes many who have bought recently in Auckland and Wellington, the most expensive markets," Davidson said.

"For those still trying to buy their first home, interest rate increases will raise the bar to entry."

However, Davidson said an increase in the OCR was a necessary step as the RBNZ looked to reign in the emergency support measures it put in place in response to the pandemic.

The suite of policies unveiled by the government to cool the housing market were yet to have an effect, he said, but he anticipated the tax changes would drive more investors to consider new-builds in the coming months.

"As the market cools ... we should see the 'normality' return to sales activity and price growth."

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