Where’s the long-awaited housing market recovery?

The country has dragged itself out of recession and mortgage rates have been falling for 18 months.

However, against conventional wisdom the long-awaited housing market recovery still hasn’t arrived.

Sales volumes have been on the up, with the Real Estate Institute of New Zealand (REINZ) reporting a 20.3 per cent increase in the number of properties sold in June, compared with the same month a year ago.

Cotality (formerly known as CoreLogic and one of the foremost authorities on the housing market) recently noted that volumes have been on a gradually rising trend for about two years.

It points out that the rise in May activity pushed sales levels to five per cent above anything we’ve seen at that point in the year since 2016.

On that basis the slump looks to be behind us, but where we haven’t seen a recovery is on the pricing front.

The REINZ house price index (HPI) has fallen for six out of the past seven months.

Nationwide prices are unchanged over the past 12 months and still 16.3 per cent below the peak in late 2021.

That’s not the case everywhere, of course.

The South Island has performed much more strongly, with Canterbury, Otago and Southland more buoyant and those regions all within five per cent of the peak.

The impact of a solid agricultural sector is likely part of the reason for that.

In contrast, Auckland and Wellington have struggled and are still more than 20 per cent below the heady levels of a few years ago.

The median number of days to sell is also elevated, reflecting a sluggish market where properties sit unsold for longer.

It rose to 50 in June, and has averaged 47 in the past 12 months.

That’s the highest since mid-2023, when interest rates were rising quickly and the economy was in recession.

Excluding that period, it’s the highest since 2008 and 2009, during the GFC.

There are numerous reasons to explain our underperforming housing market.

For a start, affordability is still awful.

Prices have been flat for two years, having fallen almost 20 per cent from the peak before that.

However, the rise during 2020 and 2021 was so dramatic (48 per cent in less than two years) that even after the multi-year slump prices are still more than 20 per cent above pre-COVID levels.

That boom was primarily driven by ultra-low borrowing costs, with the one-year mortgage rate falling to 2.2 per cent.

In data going back to the early 1960s, there’s never been a time interest rates have come close to being that low, and we might not see that again in our lifetime.

Many would argue that prices were pumped up so much during that period, they might need to fall further (or at least languish for a little longer) for reality to catch up.

Other costs of home ownership – such as rates, insurance and maintenance – have also increased sharply, while the policy backdrop hasn’t been friendly to investors.

Net migration has declined much more than expected, after hitting record highs in 2023.

To use a technical phrase, it’s fallen off a cliff.

New migrant numbers (for those of working age) were comfortably above 100,000 per annum 18 months ago, but they’ve dropped to less than 10,000 today.

Apart from the COVID-era when the borders were closed, that’s the lowest since the 2010 to 2013 period, and before that 2000 to 2001.

For many of those that are still here, job security is a concern.

The unemployment rate has been steadily increasing for three years, and it’s sitting at 5.1 per cent.

Apart from one quarter during the unusual COVID period, that’s the highest in more than eight years.

People are reluctant make major financial commitments when they don’t feel completely safe in their job.

Unemployment is expected to push a little higher as well, so a shift in sentiment could be unlikely until late this year or into 2026.

Nobody can accurately say where house prices will go from here.

Plenty of people incorrectly predicted declines in early 2020, and just as many had expected to recovery to be underway by now.

Reserve Bank forecasts suggest prices will grow by 4.2 per cent annually over the coming three years.

That’s below the long-term average (which has been 5.7 per cent since 1990) but it’s slightly above inflation, GDP and population growth expectations.

All these headwinds, as well as a high number of listings, have swung the power balance in favour of buyers, including those on the lookout for a first home.

That’s unlikely to change in the near-term, which is good news in many ways.

I’m not sure if any of us should be hoping for another boom.

A stable-but-sluggish period for house prices could be a more desirable outcome for the economy, and society overall. For the first time in a long while, the housing market is working more for buyers than sellers, and that rebalancing might be exactly what we need.

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