Rising mortgage rates are likely to stop the housing market from taking off again, even though the downturn is over, ANZ economists say.

House prices broke out of an 18-month fall in June, with the first monthly price rise since November 2021, the Real Estate Institute’s latest figures showed.

Sales also continued to recover while new listings remained low in June, according to the institute.

A recent rash of similar data has led many commentators to say the market looked to be near the bottom of the trough.

But ANZ just released its latest Property Focus report, and it suggested housing headwinds could dominate the tailwinds heading into next year.

The bank’s economists said they had been calling a turn in the cycle for a while, and the June data not only confirmed it, but was stronger than expected.

“Now the question is whether this is just a noisy start to the turn, or if the upswing has a bit more oomph than we’ve been expecting.”

The June data had some one-off factors nudging it along, they said.

There are still significant headwinds for the housing market, ANZ says.

The Reserve Bank’s easing of the loan-to-value ratios (LVRs) came into effect in June, as did further adjustments to the Credit Contracts and Consumer Finance Act.

It was also the first full month of data since the Reserve Bank called a halt to official cash rate hikes, and this probably had an impact on perceived interest rate risk, which could also influence the broader housing vibe, they said.

“Whether or not we’re entering a new FOMO-style state in the housing market is yet to be revealed, but our money is on this not being the case, or at least, that it will not persist.

“Significant housing headwinds remain, with housing still very unaffordable relative to history, the unemployment rate set to rise, and some renewed upward pressure on mortgage rates.”

That meant the economists did not think the stronger than expected housing momentum in June would persist into the medium term, and was unlikely to be the harbinger of a string of upward surprises from here.

Recent changes to mortgage rates, most of which had shifted higher over the last month corroborated this view, they said.

“If there was a tailwind for housing from dropping fixed mortgage rates, it faded in June.

“Speaking of softer tailwinds, net migration in May was still at very high levels, but the migration impulse to housing demand is no longer growing.”

It was important not to lose sight of the broader economic backdrop, with the Reserve Bank seeking to engineer a looser labour market to tame CPI inflation, the economists said.

“Our expectation is that CPI inflation will prove harder to tame than the Reserve Bank currently anticipates, pushing it back into hiking mode come November.

Fortnightly repayments
  • LVR Restrictions introduced in October 2013.
  • Interest rates are one-year fixed on a 30-year term.
  • Savings = 30% of the household income.

“That’s likely to lead to renewed upwards pressure on mortgage rates later in the year.”

The bank’s updated forecast was for house prices to rise around 3% over the second half of this year, boosted by strong, but easing, net migration and the LVR limit changes.

But next year the reality of higher-for-longer interest rates would set in, and still-stretched affordability and rising unemployment would lead to very subdued price growth, the economists said.

“We certainly couldn’t rule out a few more monthly declines in prices along the way.”

They also said the downturn now appeared to be over, but it had done little else than bring the house price to income ratio back to the level that prevailed prior to the pandemic.

While prices nationwide had fallen almost 17% from their peak in November 2021, at the trough in May they were still around 21% above their pre-pandemic level.

The correction in prices, combined with persistent growth in household incomes had seen the price to income ratio improve, and the Covid-era bump unwound, but the ratio was still very high, they said.

“There has been no fundamental shift between supply and demand dynamics, as New Zealand now has a widening housing deficit, and housing is still unaffordable relative to history.”


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