Lucy Craymer

WELLINGTON (Reuters] – Aarti Kathuria, Gaurav Kathuria, and their three-bedroom Auckland townhouse, were trying to save for their first home. They cut down on dining out in order to put aside enough money to make the deposit.

After purchasing a property in the least affordable city of New Zealand, NZ$875,000 (or $560,000), they now have a new problem: Property prices are dropping, and mortgage rates and living cost are on the rise.

Policies designed to cool down the hot housing market in New Zealand have resulted in a decline of property values. For Kathurias however, this has led to a reduction in household wealth.

Aarti Kathuria said, “All you have to do is cut down on things.”

According to the Real Estate Institute of New Zealand, house prices rose 43% between December 2021 and December 2021 in New Zealand. These were higher than they had been before the COVID-19 pandemic. Since December, they have fallen by around 1%.

Unsustainable home prices https://graphics.reuters.com/NEWZEALAND-ECONOMY/PROPERTY/jnvwernwbvw/chart.png

Adrian Orr, Governor of the Reserve Bank of New Zealand said that “over the past twelve months people have entered into that very high house-buying frenzy” and noted that most households are still in strong equity positions.

In order to have a buffer against future expenses, the Kathurias want to preserve 30% of their annual income. They are now taking the train and walking to work to avoid rising petrol prices and food costs.

The past two years have seen housing affordability plummet as home prices rose and debt increased. This was due to record low interest rates and massive fiscal relief, and inability for Americans to travel overseas.

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Barrenjoey, an Australian financial company, stated that nearly 40% of New Zealand loans were made to borrowers who owe more than six-figures.

UNSUSTAINABLE

RBNZ is required to assess house prices during its policy discussions. It raised its cash rate last October after being told that house prices were “unsustainable” at the time.

So far, it has increased the cash rate 1.25 percentage point and is forecast to increase further.

Orr stated last week to a committee of parliament that the house prices needed to fall as high as 20% before they could be sustained.

According to some economists, house prices will fall by 10% in the coming year.

Lower house prices will help government achieve its affordability goals, but weaker assets, rising inflation, and increased debt could all lead to lower consumer spending.

It would be more challenging for homebuyers who have recently purchased a house to repay their loan as the interest rate rises.

Last week, the RBNZ declared that “a sharp correction is still conceivable and could have large economic implications.”

According to the central bank, around half of all property owners who have purchased a home in the past twelve months would need to “belt tighten”, if rates for mortgages rise above 7%. The floating mortgage rate offered by major banks is currently around 5.5%.

Miles Workman is a senior economist with ANZ Bank. He said that recent buyers who have borrowed heavily are most likely to fall into negative equity when prices drop.

He said, “That’s going to hurt psychologically.” The labour market is tight so it’s best for those who are first home buyers to be able to persevere.

As a result of rising prices and higher loan payments, economists predict a drop in consumption.

Michael Gordon, Westpac’s New Zealand chief economist, stated that these elements could cause a squeeze on the economy.

“The Reserve Bank is facing a very difficult balancing act – probably the hardest that they faced in the inflation targeting era,” he said.