That could mean the “new normal” for mortgage rates is closer to 5% than 3% or 4%.
Policy changes will also help, with Credit Contracts and Consumer Finance Act (CCCFA) restrictions having softened and the interest deductibility returning for investors.
Migration is likely to remain supportive too, although it’s well down from its highs and headed lower.
On the other side of the coin, the costs of home ownership have increased sharply in recent years.
Mortgage rates are coming down but higher insurance, rates and property maintenance costs are here to stay.
The labour market is also expected to weaken further, despite a string of OCR cuts on the horizon.
Reserve Bank governor Adrian Orr during his OCR press conference in Wellington in August. Photo / Mark Mitchell
The unemployment rate has increased to 4.6%, up from a multi-decade low of 3.2% in 2022.
Reserve Bank projections suggest it will keep rising, peaking at 5.4% next year.
When people don’t feel confident about their job security, they’re more cautious about borrowing, buying or spending decisions.
The biggest headwind of all could be the fact affordability remains low, and prices are still high compared to history.
The Real Estate Institute’s national house price index fell by 18.1% between November 2021 and May 2023, and prices haven’t moved much since then.
That was a big fall, but don’t forget prices surged 48% in the two years leading up to that 2021 peak.
That’s a staggering rise, given the average gain since 1990 has been 5.9% per annum.
It means that - even after such a substantial decline - prices are still 22% higher than where they were at the beginning of 2020, just before the pandemic hit.
Rents haven’t risen as much as prices, which means yields don’t look as attractive to investors.
According to CoreLogic, national gross rental yields are around 3.8% while in Auckland they’re a little lower at 3%.
That’s higher than 2022 when prices were close to the peak, but it’s below where yields have typically sat in the past.
Unless an investor can see opportunities to add value, those levels of income (which are before costs) might not yet be compelling.
When you put all of that together, I still think it’s a good time to buy, especially for first-home buyers.
If you’ve got a deposit together and funding lines in place, you’re in a good position and are luckier than many.
As interest rates keep coming down, more competing buyers will enter the fray and their purchasing firepower will increase.
That suggests it might get harder rather than easier from here, especially if prices start moving up at the same time.
The worst is behind us, and we should see a recovery in the housing market over the coming years.
However, I would be banking on modest gains rather than spectacular ones.
We might see something closer to the 5-7% annual average we’ve seen over the long term, rather than the double-digit rises we’ve seen at times in the past.
Mark Lister is investment director at Craigs Investment Partners. The information in this article is provided for information only, is intended to be general in nature, and does not take into account your financial situation, objectives, goals or risk tolerance. Before making any investment decision, Craigs Investment Partners recommends you contact an investment adviser.
