Why is New Zealand's Housing Market Soaring? (A 2021 Property Trend Guide)

September 8, 2021
 min read

New Zealand’s housing market has shown no signs of slowing down, with record prices continuing to soar into 2021. The sharp rise in median house prices have been at the centre of public discourse in recent months, with growing concerns surrounding the price increases and buyer frenzy driving the market. According to the Real Estate Institute of New Zealand, the median national house price in October 2019 was $605,000. By October 2020, that figure had risen to $725,000. Meanwhile the median price in Auckland is now above $1 million.

Earlier this month, Trade Me Property reported that the national average asking price for property in New Zealand had also seen the largest annual growth on record. The median price for property across the country has now hit $769,000 according to Trade Me Property’s latest price index. This is a 15% increase from January 2020 and every region except Otago and Auckland has hit record asking prices.

So what is causing New Zealand’s housing market to soar and what will happen in 2021? In this blog post, we will explore the main factors contributing to the biggest year-on-year percentage increase on record for New Zealand and also look to the year ahead to see if this trend will continue.

Why Are Prices Skyrocketing?

With historically low interest rates and the removal of loan-to-value ratio restrictions, more Kiwis were able to enter the property market in 2020. New Zealand’s impressive and rapid recovery from the COVID-19 pandemic also helped investors, while Government plans to increase the top tax rate while keeping capital gains tax low made property investment more attractive. However, perhaps the biggest contributing factor has been a fast-growing population and expats returning en-masse from overseas due to the COVID-19 pandemic, which has led to an increase in demand and a lack of supply.

According to Westpac’s chief economist for New Zealand, the historically low cash rate set by the Reserve Bank of New Zealand (which currently sits at 0.25%) is the biggest factor behind the rise. In a report made for clients, Dominick Stephens noted that the extremely low mortgage rates available to borrowers is a much more important factor than shortage of supply or migration.

“The driver of the current increase in house prices is low interest rates,” Stephens wrote.

“Physical factors like net migration and housing supply cannot be the driver right now – net migration has been zero since April, and the construction sector is booming.”

Meanwhile, other experts have argued that interest rates are not the main driver behind the price soar. Instead, they suggest the main reason for the price hike is a shortage of supply. Some have even encouraged the government to create more supply in the form of low-cost social housing, or to change the tax system to make the searing property market a bit cooler.

What To Expect In 2021?

Dominick Stephens has also forecast a continued rise in house prices over the year ahead. In the February report, Stephens noted that prices could increase by another 12% in 2021.

“All of the usual indicator dials are now redlining, indicating ongoing rapid house price inflation for at least the coming few months,” Stephens wrote.

Stephens also mentioned that market turnover is at its highest since 2007, the average days taken to sell a property is the lowest in four years and that available stock is at an all-time low on real estate websites.

Annual data from Realestate.co.nz revealed that as prices have risen, so too has demand. The number of people searching for property increased by 23% nationally when compared to 2019. The number of people who searched for property in 2020 also tripled when compared to 2016, indicating a large increase in demand that is set to continue.

Another influential real estate site, Trade Me Property, also highlighted this growth in demand as a trend set to continue in 2021. According to sales director Gavin Lloyd, national year-on-year demand was up 15%, while supply was down 18%.

“An increase in demand was seen across the country in every region except Gisborne, while supply was down, when compared to last year in every region except Auckland,” Lloyd said.

“As we have seen consistently over the past few months, demand outstripped supply in January which put pressure on the market and pushed prices up.”

Is This Rise Sustainable?

Influenced by record-low mortgage rates, strong consumer sentiment and demand outweighing supply, New Zealand’s property market is soaring. For many investors at this time, property seems the safest investment. However, housing accessibility for first-time or low-income buyers, as well as renter protection, is a growing concern for Jacinda Adern’s government. This could lead to various policies and regulations that attempt to improve housing affordability and close the equality gap.

For example, with New Zealand’s Reserve Bank set to reinstate mortgage lending restrictions next month, national house prices could begin to plateau. The Reserve Bank will raise lending hurdles for investors and are set to tighten loan-to-value restrictions on mortgage lending. The Reserve Bank is set to reimpose loan to value ratios from March 1 at 20% for first-home buyers and 30% for property investors. For investors, the loan to value ratio will rise to 40% from May 1, meaning investors won’t be able to borrow more than 60% of a property’s values. All of this is set to challenge New Zealand’s skyrocketing house prices, but whether these changes slow the market down remains to be seen.

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