The prospect of the Reserve Bank hiking interest rates in the face of another hit to the economy is lifting warnings that New Zealand could soon see falling house prices.

New Zealand’s house prices are among the most expensive in the world relative to incomes, propelled by record gains from migration in the years leading up to Covid-19, followed by a further boost when interest rates were slashed in 2020 and the Reserve Bank pumped billions of dollars into the financial system to maintain confidence.

Prices continued to climb throughout 2021 despite migration falling close to zero, with TradeMe reporting on Tuesday that the asking price on properties listed on the website rose by a record 25 per cent last year.

A sharp increase in the outlook for interest rates, coupled with negligible gains from migration and a booming construction industry is prompting predictions that the outlook has quickly changed.

In a note to clients late last week, investment advisory Forsyth Barr stopped short of officially forecasting a correction (acknowledging a divergence in views on the topic within the firm), but outlined a series of factors that could drive prices lower, possibly sharply.

“We would not be shocked to see a meaningful drop in prices through 2022,” Matt Henry, Forsyth Barr’s head of wealth management research wrote in a focus piece the wealth manager released on Friday, which questioned whether the New Zealand housing market was “Built of bricks or built of cards?”

Henry wrote that the sharp increase in prices over the past two years, booming construction, low migration changed the dynamic between supply and demand.

Meanwhile, households faced the sharpest increases in mortgage rates in 15 years since late 2021. Owner-occupiers were facing increased difficulty obtaining credit since the Credit Contracts and Consumer Finance Act (CCCFA) came into force at the end of 2021, while investors faced plunging rental yields and tax changes removing interest deductibility and an extended bright-line test.

“Some of us think declines are highly likely and that these could be significant; others are more sanguine,” Henry wrote.

“What there is agreement on is that the market does look more vulnerable today than it has for a long time.”

A survey of mortgage advisers conducted by economist Tony Alexander on behalf of mortgages.co.nz released this week showed most mortgage brokers were reporting fewer investors and first-time buyers, as well as a reduced willingness by banks to lend.

Several New Zealand banks are expecting house prices to fall this year, with BNZ forecasting a drop of more than 3 per cent this year, with a smaller drop in 2023.

Westpac has forecast prices will begin to fall in the second half of the year, but warned earlier this month that weak house price figures from the Real Estate Institute from December could mean the falls begin sooner. “That in turn could have implications for the strength of consumer demand this year, and the extent of OCR hikes that will be needed to keep inflation in check,” Westpac acting chief economist Michael Gordon said.

Statistics New Zealand is expected to report on Thursday that annual inflation rose close to 6 per cent at the end of 2021. The Reserve Bank is widely expected to hike the OCR again in late February, its first scheduled review of the year.

Last week ANZ warned it now expects the OCR to peak at 3 per cent in 2023, as policymakers struggled to get inflation under control, irrespective of what it could do to households with mortgages.

“The housing market appears to be coming to a very sudden stop; households are facing significant cost-of-living stresses and have subdued confidence; a shortage of workers and materials is hampering production; and Omicron is knocking on our door,” chief economist Sharon Zollner said.

“But the reality of a prolonged negative supply side shock is that even modest growth can stretch resources and cause inflation. The trade-offs are unpleasant and there’s no way around that.”

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