Boom and bust: How the Kiwi housing market compares with the world

RBNZ report looks at how our housing market is holding up compared to other countries. Photo / Rafael Ben-Ari, Chameleons Eye

Over the past five years, New Zealand house prices have risen in real terms more rapidly, and declined more rapidly, than in many house price booms and busts in other advanced economies, the Reserve Bank (RBNZ) says.

The RBNZ has today released new housing market data as part of its latest Financial Stability report.

In a special research topic looking at international comparisons, it concludes that New Zealand’s recent house price cycle has been rapid compared to overseas examples, but with comparatively less financial system stress.

“The high-inflation environment, including wage inflation, has eroded the real value of borrowers’ debts. This contrasts, for example, with Ireland in the GFC (Global Financial Crisis), where multiple years of deflation raised real debt burdens,” the report says.

The labour market had also been relatively resilient as economic activity slowed. This supported household incomes, enabling borrowers to meet higher interest repayments without falling into arrears.

“House prices were at or near their peak level for only a brief period. This meant that a limited proportion of buyers from recent years purchased their properties at prices close to the peak. A prolonged period of purchases at unsustainable prices would have led to a larger accumulation of risk.”

Assessing the current state of the market, the RBNZ said house prices “remained stretched for prospective buyers, and are around the top of our estimate of sustainable level”.

“Despite house prices easing, the elevated interest rates mean that purchasing a new house remains relatively unfavourable compared with long-term averages.

To assess the sustainability of house prices the RBNZ considers the mortgage servicing costs for a new buyer, both relative to average household incomes and relative to the alternative option (renting).

These two indicators rose rapidly as house prices were peaking in late 2021, and they have remained at historically high levels.

Investor activity weak

Investor activity had remained weak but could pick up following recent tax policy changes, the report said.

“Subdued rental inflation means that the expected yields on investment property also remain low compared with borrowing costs. Investors have been relatively inactive in recent years, commanding a low share of total new mortgage lending.”

But recent tax policy changes were favourable for investor demand.

The deductibility of mortgage interest costs from taxable rental income will increase to 100% in April 2025, from 80% currently.

Deductibility improves investors’ debt servicing capacity and will increase investors’ valuations of existing properties.

Also, since July, the “bright-line” period for assessing the taxable status of capital gains on investment property has been reduced to two years from 10 years.

This change could increase speculative housing purchases, at the margin, the report said.

“In the short term, the change means that investors facing cashflow pressures from high interest rates may seek to sell properties they had been holding on to, due to the previous longer bright-line periods that applied.”

Outlook subdued

Borrowers’ capacity to take on more debt was increasing as monetary policy was eased, the report said.

“However, the weaker economic environment means households are exercising caution. The level of interest rates is still high by recent standards and lending growth has been low over the past year. It is uncertain when and by how much demand for new borrowing will pick up.

“Looking ahead, government policy changes are under way to increase long-term supply responsiveness in the housing market,” it said.

“Better supply responses to housing demand will help to moderate future house price cycles and improve housing affordability. Debt-to-income restrictions will also play an important role in moderating demand cycles and reducing the buildup of risks.”

Liam Dann is business editor-at-large for the New Zealand Herald. He is a senior writer and columnist, and also presents and produces videos and podcasts. He joined the Herald in 2003.