There’s little doubt the housing market has started to come back to life over the last few months. In this article, we examine the indicators showing the market’s pick-up and what’s been driving that recovery. We also look at how pronounced and persistent the pick-up might be, and we explore the implications for future monetary policy settings and residential construction activity.

Monthly house sales have averaged 5,626 between June and August (seasonally adjusted). This figure represents a 23% lift from the average sales volumes recorded between November 2022 and January 2023, when the annual sales total looked like it could slip below the trough of 53,220 recorded during the Global Financial Crisis.

Despite the pick-up, it’s worth reiterating that current sales volumes are still about 17% below the long-term average and 38% below the peak in activity at the end of 2020. The market is not running hot, but it has clearly warmed, which will be heartening for agents to have more sales being completed.

Sometimes when sales pick up after a period of market weakness, the lift in volumes is driven by sellers becoming more desperate to unload property, rather than a genuine improvement in buyer demand. In that situation, prices continue to soften. But the current lift in sales is being accompanied by a rise in house prices, which suggests there are more buyers in the market. REINZ’s house price index has edged up 2.3% over the last three months (seasonally adjusted), representing the first price rises since property values peaked in November 2021. House prices are still down 4.4% from a year ago and 15% from late 2021, but the change in direction is unmistakable.

Properties also spent an average of six fewer days on the market in August than they did in March (seasonally adjusted).1 The rate of turnover has not been faster in 15 months.

The housing market’s boom in 2020/21 and subsequent downturn in 2022 was clearly driven by significant movements in interest rates. Even before the COVID-19 pandemic, the lowest available mortgage rate had got down to 3.4%, but the Reserve Bank’s monetary policy response to the pandemic saw mortgage rates get down as low as 2.2% in mid-2021. The effects of these ultra-low interest rates on demand were amplified by the Bank’s removal of all loan-to-value ratio restrictions between May 2020 and March 2021.

The most unusual aspect of this boom was the disconnect between the market and its other key driver, population growth. Although population growth spiked in the lead-up to the pandemic, much of this increase was “accidental”, with people in New Zealand on work visas getting stuck when the borders were closed and air connections disappeared. Given the uncertainty these people faced about their living arrangements, we would not have expected them to underpin an increase in demand to purchase housing. Furthermore, when population growth fell away sharply later in 2020, it seemed to have little effect on the housing market.

In the reverse of the 2020/21 experience, the lift in mortgage rates to 6.4% by the end of last year and reinstatement of tighter loan-to-value ratio restrictions has had a massively negative effect on the housing market. However, even with one-year mortgage rates pushing above 7% for the first time since 2009, and the lowest available rates holding close to 6.5%, the market is showing signs of recovery this year. Given the current weakness across the broader economy, there is little else to pin this improvement on except the massive surge in net migration, from -19,628pa in May last year to 96,193pa by July this year.

We see few positives from any sort of sustained increase in house prices. Current mortgage rates mean that debt-servicing costs remain prohibitive for most potential property purchasers. For a first-home buyer looking at the median-priced house, even with the house price falls during 2022 and early 2023, mortgage repayments now would still be 10% higher than they were at the end of 2021. More instructively, repayments are 72% higher than at the end of 2018 and 89% higher than at the end of 2015. In contrast, average wages have risen 24% since 2018 and 35% since 2015. By this metric, housing is still highly unaffordable, despite the Reserve Bank’s assertion in its latest statement that “house prices remain around estimates of sustainable levels.”

As a result, we see limited upside for house prices while mortgage rates remain at current levels. The debt-servicing constraint that brought an end to the FOMO in 2021 remains in force, and it will prevent purchasers from paying significantly more for property. Increases totalling 5-10% during 2024 appears to be as much as buyers could realistically bid up prices before banks become unwilling to lend any more, based on borrowers’ incomes and debt-servicing ability. Debt-to-income restrictions are now also available to be introduced by the Reserve Bank, if it considers that rising house prices and increasing mortgage lending are starting to pose financial risks to the economy.

The exception to the income constraint on house prices would be buyers entering the market who do not need to max out their borrowing capacity from the bank. Such buyers are most likely to originate from overseas. Some of the immigrants settling in New Zealand could have more cash than the minimum 20% deposit we generally use when calculating the affordability of debt servicing. The upcoming election result could also affect the market dynamic, with more investors looking to purchase if a National-led government repeals Labour’s tax restrictions for investors or reopens the door to foreigner purchasers for property over $2m. At this stage, it is unclear how much either of these factors could add to demand and further push up house prices.

We also note that we think net migration is close to peaking, and that arrival numbers will fall away sharply during 2024 as demand for workers softens and employment opportunities within New Zealand become less common. By this time next year, weaker net migration numbers are likely to reducing upward pressure on house prices – implying that any resurgence in the housing market could be reasonably short-lived.

Yesterday’s Monetary Policy Review by the Reserve Bank downplayed the housing market’s recovery. As well as the comment about the sustainable level of house prices, the Bank also implied that the pick-up in house prices was not that meaningful because it was accompanied by "low sales volumes” (the Bank’s words, not ours).

In the near-term, then, we don’t expect the housing market’s performance to have any effect on monetary policy settings. The Reserve Bank appears to be reluctant to raise interest rates further, and the housing market is not a central part of its operating mandate. If monetary policy is tightened further, the housing market is likely to be much less of a factor in the decision than the persistence of broader cost or inflationary pressures and the strength of domestic demand across the broader economy.

Nevertheless, the Bank has previously worried about the role that higher house prices play in supporting greater household spending. As a result, we maintain a note of caution that the Bank might come around to a more hawkish view regarding higher house prices if spending also remains stronger, requiring further interest rate action.

A more positive outlook for house prices also has potential flow-on effects for residential construction activity. Developers have struggled with the combination of falling property values and rapid building cost inflation over the last two years, squeezing margins and undermining the viability of new projects. Rising house prices will start to improve those margins a little and could lead to an increase in enquiry levels from potential buyers.

However, given the backlog of consents awaiting completion, the likely temporariness of the current migration spike, and the fact that residential consent numbers are still very high by historical standards, we do not see much scope for an outright increase in consenting activity during 2024 and 2025. Instead, higher house prices are likely to stop consents falling as much as otherwise would have occurred.

If the pick-up in house prices remains relatively mild and short-lived, we would expect the upside for residential construction to be similarly limited. In short, a more subdued outlook for building activity remains.

1 We have ignored the much higher figure in February, when the average home took an additional seven days to sell. This result was skewed by the Auckland floods and Cyclone Gabrielle.