Three years ago, New Zealanders would have it found it almost impossible to imagine the country’s sky-high house prices falling.
The market was deemed one of the least affordable in the world, with house prices nearly nine times the average income and supply dismally low. Desperate first home buyers were being squeezed out of the market by cashed-up investors.
Some of those in low paid or no work were thrust into homelessness and waitlists for social housing ballooned. In mid-2021 the crisis reached fever pitch, with the national average house price exceeding NZ$1m.
But now, those prices are trending downwards. According to government-owned property valuer QV, national averages have fallen 13% since 2021, while Auckland has dropped nearly 20% and Wellington 30% - prompting questions about whether New Zealand has finally managed to turn around its housing crisis, and what it could mean for other overheated markets around the world.
What led to New Zealand’s overheated market?
In the decades leading up to the pandemic, home ownership became an increasingly distant hope for many New Zealanders.
Urban planning regulations had stymied housing development, public housing was being sold off and the population was rapidly growing, putting pressure on the limited housing supply.
Incomes did not increase at the same rate as house prices and the country’s tax and lending systems favoured investors and homeowners, making it harder for first home buyers to enter the market.
New Zealand’s housing crisis worsened dramatically during the pandemic.
“Covid kicked things into a whole other gear,” says Brad Olsen, an economist and the chief executive at Infometrics.
“To try and stimulate the economy, we dropped interest rates to absolute record lows, and that worked incredibly well – so well that it saw house prices at one point up 20-30% on where they were a year before at a national level.”
When house prices rise, investors “become very active,” says Andrea Rush, the national spokesperson for valuer QV. “Everyone gets on the bandwagon.”
Meanwhile, high immigration during that period increased pressure on the market.
“We had over 100,000 net gains of migrants and New Zealanders each year at that time, all needing somewhere to live,” Rush said.
Why are house prices now falling?
Now, the tide is turning. QV’s latest quarterly figures show national averages have dropped by 13.1% since the January 2022 peak, bringing the new average house price to just over $900,000.
Multiple factors are driving the downward trend, Rush said. The incredibly low pandemic-era interest rates had increased from roughly 2% to as high as 7-8% in recent years, making borrowing “incredibly difficult”.
High unemployment in New Zealand, and record numbers of New Zealanders moving overseas has also reshaped the landscape, Rush said.
Meanwhile, policies to promote intensification are starting to bear fruit, says Dr Michael Rehm, a senior lecturer in property at the University of Auckland.
“At all levels of government, they want to promote housing supply,” Rehm said, adding that as demand slows and supply increases, the perception that housing is a safe investment has slipped.
“Buyers and sellers are starting to get this impression that house prices in New Zealand do not always go up, and we’re finally breaking down that long-held belief.”
Is this the end for New Zealand’s housing crisis?
For those who bought at the height of the market, the drop in values may be a bitter pill to swallow but it will be welcome news to first home buyers and to renters, experiencing cheaper rents.
So is the housing crisis over? Experts have offered a resounding “no”.
The housing market could only be viewed as affordable if compared with “the Mount Everest of house prices”, Olsen said. Around 40% of the average household income is spent on mortgages – more affordable than the peak years at about 47% but not affordable overall.
Rehm said fixing the crisis would require getting house prices more in step with household incomes. “But we are so out of whack still.”
Meanwhile, interest rates are higher than during the peak. Paying back a mortgage at 6% or 5.5% interest, as opposed to a 2% during the pandemic, may make housing more expensive, Rush says.
Prime minister Christopher Luxon told RNZ this week he hoped to see modest price increases. His housing minister, Christopher Bishop, however, wants to see them fall.
“House prices outright falling would actually be advantageous,” Olsen said, adding that decoupling investment and housing is a good thing.
That will be difficult, because many people have their wealth tied up in a house, Olsen said. “But over time, we’ve seen the sort of social ills and social challenges that have been created by having an overly hot and too expensive housing market.”
What does it mean for other markets?
New Zealand has long been watched as a canary in the coal mine for the world’s property markets. It is not the only country to experience a major reversal in house prices. Canadian prices have slumped by C$150,000 since 2022, leaving the median Canadian home nearly 20% cheaper.
Australia meanwhile is yet to experience a crash and will be “looking at what’s happening here closely”, Rehm said. Like New Zealand, Australia does not have many institutional investors in the market.
“It’s a lot of ma and pa investors … they’re all banking on the fact that [housing] is going to increase in price, and if it doesn’t, then that’s a huge problem.”
Olsen said Australia might be looking at New Zealand’s slowing market with envy, as they watch their own prices continue to rise.
“If I was looking at other countries like Australia, I don’t know if I could say: ‘you know what, things look like they’re getting into a better place’. They’re just continuing to get more and more unaffordable.”
