Properties are now 17% more affordable than their December 2021 peak, though a third of mortgage holders missed out on earlier rate cuts
New Zealand's housing market continues to flatline, but this sideways movement is delivering the first meaningful improvement in affordability in over four years, according to new analysis from BNZ.
BNZ’s latest housing affordability index shows properties are now about 17% more affordable than at their worst point in December 2021, representing the "least bad" affordability conditions since December 2020.
Prices are treading water
BNZ chief economist Mike Jones (pictured left) said recent REINZ data confirms the housing market recovery has stalled. After seven consecutive monthly increases in the seasonally-adjusted House Price Index, small falls were recorded in June and July.
The bank has nudged its annual house price inflation forecast down to just 1% for this calendar year. If accurate, this would see prices end 2025 back around early 2021 levels, or 2020 levels when adjusted for general inflation.
Jones said that while the Reserve Bank’s rate cutting could “inject a little more pep” into the market over the rest of 2025, this still needs to be balanced against strong supply and reasonable affordability.
“A strong month for new listings in August pushed available housing inventory back up to near 10-year highs,” he said.
“Flattish house prices may not have done much for the so-called wealth effect and hence the broader economic recovery, but the flip side has been a noticeable improvement in housing affordability metrics.”
On affordability, BNZ’s index tracks three core components: deposit requirements, mortgage servicing costs, and household incomes.
The combination of stable house prices, falling mortgage rates and continued wage growth has pushed affordability to its best level in over four years. However, properties remain 7% less affordable than pre-COVID levels in March 2020.
Auckland and Wellington have seen the largest affordability improvements over the past 12 months, though they remain the most unaffordable regions. Regional differences have generally narrowed over recent years.
Relief coming for mortgage holders
The improving affordability picture should get further support from additional Reserve Bank rate cuts, with about a third of the mortgage book set to refix by year-end. Kiwibank chief economist Jarrod Kerr (pictured right) believes the RBNZ has finally recognised the economy needs more support.
"I think the shock that the economy is contracting again is probably what slapped them into action,” Kerr said.
“The data has come in softer, we know that. I think they’ve realised, oh gee, the economy contracted in the June quarter. We’re supposed to be a year out of this recession, and we’re not.”
RBNZ has now signalled cuts to 2.5%. For mortgage advisers and their clients, this indicates some strong immediate relief on the horizon. Kerr points out that around a third of the mortgage book has rolled over since May – but an additional third is still to come.
“The statement that we got was exactly what we needed, it just had the wrong date on it,” Kerr said.
“It should have been dated May. About a third of the mortgage book has rolled from May to August, and those loans could have rolled onto lower rates. But that’s behind us, what’s ahead of us is more rate cuts, and we’ll have another third of the mortgage book rolling off by the end of this year. So there is some relief coming for households.”
Different scenarios ahead
BNZ's scenario analysis shows a 100 basis point OCR cut would pull mortgage rates lower and deliver a modest affordability lift. If income growth stalled from current levels, this would erode about half of the affordability improvement post-COVID.
Holding house prices flat for two years – a “far from inconceivable scenario” according to Jones - would see the affordability index regain levels prevailing in March 2020.
“It highlights how difficult it is to claw back affordability in the wake of a house price boom,” Jones said.
“For the record, none of the above has much of a bearing on our house price view,” he added.
“It might be tempting to view the affordability improvement as allowing additional ‘room’ for house prices to rise. However, houses are far from affordable in absolute terms and other macro factors – the labour market, housing supply dynamics, interest rates, and population growth – tend to carry the day for the immediate house price cycle.
“As noted earlier, our best guess is that the net of these is pointing broadly sideways.”
