We are living in strange times. Covid-19, the war in Europe, inflation, climate change, supply-chain disruptions, ever-rising interest rates, developers going into liquidation ... given these headwinds, will the property market weather the storm?

The May data from REINZ makes for interesting reading. It reveals that the credit crunch, uphill interest rates, and increased number of houses for sale, are continuing to dampen the market, with an unimpressive 2.4 year-on-year increase in prices. In dollar terms, this sees prices rise from from $820,000 in May 2021 to $840,000 in May 2022.

Month-on-month is more dramatic — the median price for residential property slipped by four per cent, from $875,000 in April.

But house prices are just one part of the story. The wider economy is displaying signs of distress.

The most recent GDP figures, down 0.2 per cent to for the quarter ending March 2022, are concerning. Given the backdrop of global gloom economically, fueled by the war in Ukraine, this result isn’t completely unexpected.

Omicron has also played a huge role. “The impact of this has been massive,” says Sharon Zolner, chief economist at ANZ.

“We are used to forecasting around demand. However, we know there is a massive demand, but the supply isn’t there due to the impact of Omicron in the community.”

RBNZ is likely to continue increasing the OCR as a tool against inflation; Adrian Orr indicated (in late May) it may head towards 4 per cent by the middle of next year. This means interest rates will continue to rise.

The supply shortage is another factor affecting the property market. The new build sector is being hampered by supply chain issues and the lack of tradies on the ground.

After Simplicity Living’s announcement of the importation of substitute plasterboard from Thailand, and a subsequent meeting with Fletcher Building around their GIB monopoly, Auckland Council has agreed to cut back on red tape around plasterboard alternatives.

This may help ease supply issues in the near future, but there is still a crisis around supply of other products, which will continue to drive up costs.

The Financial Markets Authority’s 2022 Investor Confidence Survey has seen confidence drop from 72 per cent in 2021 to 66 per cent. And the mainstream media is starting to ramp up the drama: a recent Stuff story, post-REINZ’s May figures, screamed “Latest house price data shows another bloodbath”.

So, do property investors need to worry? Is there likely to be a vertiginous drop in house prices? Or is this just the tipping point of a regular property cycle?

We gathered the expert opinions of five industry leaders to try and make sense of where the housing market, and the economy in general, is heading.

Sharon Zollner,

Chief Economist ANZ

We are in the unprecedented situation of seeing interest rates rising while the housing market is dropping. It seems likely the Reserve Bank will get more traction (with monetary policy) than they expect, and we are likely to see a harder landing (in the housing market) than expected because of this. And we are likely to feel the real effects of this quite quickly.

Soft data (from an ANZ survey) revealed that 50 per cent of respondents in the construction industry are expecting less residential construction in the next 12 months. It’s more than just GIB shortages; the cost of building is trending up as house prices move down.

There is also a flight risk from the people who moved back to New Zealand at the early stages of Covid-19. It’s likely that many young people will leave the country, and Australia will start looking like a good option for others. So, it’s not clear whether net immigration will see an increase. ANZ is picking a 12-14 per cent drop in house prices over 2022, but given all the factors in play, making accurate price predictions is like trying to catch a falling stone.

Kris Pedersen,

Kris Pedersen Mortgages

I am definitely hearing about parts of the market heading down, particularly in the lower socio-economic areas. Properties are coming off the market because people aren’t getting the prices they want and I predict a lot of “bad news” stories (around the property market) appearing in the media in coming months. Having said this, the investors we work with aren’t voicing concern yet.

Investors will start to feel the effect of interest deductibility removal later this year and early next year. But National are saying they will remove this if they get in, so more savvy investors may take a punt on them getting in at the next election.

The real pressure (of house price drops) is likely to be felt by first home buyers, who bought with very low deposits. If the house prices fall more than 10 per cent, they will be 100 per cent geared, which could be problematic. Investors who have bought recently needed a 40 per cent deposit, which would cushion them from this price drop.

I think we will probably see some interest rates move into the six per cent range in the next 12 months or so. But at this stage we are not seeing any mortgage stress, but investors do need to look at their portfolio to see when their interest rates are coming off and start to consider exit strategies if the numbers don’t work.

Andrew King,

President New Zealand Property Investors' Federation

There was a general acceptance that we were in the late stages of a property cycle at the end of last year. But there are so many complicating factors that it’s very hard to predict what will happen to the market over the next year. It’s fair to guess that price rises are coming to an end and we will see a continuation of a soft market.

The impact of interest rate deductibility is just starting to be realised. We are about to launch a calculator on our website that enables investors to crunch the numbers and establish how this will affect them. We encourage investors to use this and think about their portfolios.

‘We are about to launch a calculator on our website that enables investors to crunch the numbers and establish how this will affect them’ Andrew King

We are seeing some developers go broke, and we may see some others having to sell for less than they expected, or just to break even. This could lead to some bargains for savvy buyers.

Investor demand has been dropping due to the range of factors in play, particularly interest deductibility removal. This incentivised the purchase of new builds, but with ongoing supply chain disruption due to Covid-19 and the war in Ukraine, and the lockdowns in China, the cost of buying new is increasing, and the yields aren’t looking great.

I don’t think we will see dramatic drops in the cost of housing, however. People are more likely to take their homes off the market if they aren’t getting the prices they want.

Regarding interest rates, the banks stress test borrowers to about the level they are likely to rise to, so it’s unlikely higher rates will cause too much trouble to investors.

Kelvin Davidson,

Core Logic Chief Economist

There has definitely been a turning point (in the market) and sales activity is weaker. While we don’t like to do price forecasts, it seems that the post-GFC fall of around 10 per cent, with a few flat years following, could be the likely scenario.

The market would have to fall 30-40 per cent for it to get back to the pre-Covid levels, and this seems extremely unlikely. And as long as investors don’t have to sell, they should be OK. But those who are hoping for a quick snap back to extremely fast price gains are likely to be disappointed. It’s sensible to assume we will experience a long flat patch in the market.

Fifty per cent of mortgages in New Zealand will go to refinancing in the next 12 months, and this could be a significant issue as interest rates climb. The development sector, in particular, could feel this particularly hard.

But even if a lot of developers fail we are still unlikely to see a surge in the number of properties sitting empty. We know there are a lot of “hidden households”: intergenerational households, shared dwellings, people who are living together due to the high cost of housing. If property prices start to fall, these people are likely to come out of the woodwork and soak up existing properties.

However, new investors may start thinking twice about property investment. It’s likely there will be low capital gains for the next three to four years, so new investors are likely to be topping up the properties from their income. This may make property investment harder to justify.

First home buyers and new investors who have bought recently are the ones with the most to lose. Investors’ LVR requirements mean they need a reasonable deposit (40 per cent), which is a buffer.

But if we end up going through a period of high unemployment, those with little equity in their homes will start to struggle.

Jen Baird,

Chief Executive At REINZ

Over 2021, we saw property market prices reach record levels, at a record pace, across the country – underpinned by low supply and high demand, record low interest rates and a willingness from banks to lend. Since November 2021, the market has come off its peak; largely due to a raft of government measures and Reserve Bank interest rate action to quell that upward pressure. The reintroduction of LVRs, changes to tax rules for investors, new planning rules, and tighter lending criteria all culminated to change market dynamics. Finally, changes to the Credit Contracts and Consumer Finance Act (CCCFA) in December pushed market sentiment over the line – we quickly saw the market lose its urgency, as buyers hit pause to take stock and a sense of FOOP (fear of overpaying) emerged.

Market pace has moderated. The percentage growth rate has eased significantly compared to the heights of 2021. We have noted volatility in prices across the country, sales are down, and levels of inventory have increased dramatically – in some regions doubling on an annual comparison, most notably Wellington and Manawatu/Whanganui. While property prices tend to be sticky on the downward side, as we move into May we see growth suppressed. Those who have been in and watched the property market longer term will know that this is how the real estate cycle goes.

Despite this undeniable shift in the market, there are opportunities. While changes to the Residential Tenancies Act have added complexity for landlords recently, property is a longer-term investment. Choosing the right property within a strong local economy, to which you can add value or achieve a strong rental yield, is optimal.