The housing market has been one of the key indicators of increasing stress for households over the last few months. After a mild but short-lived rally during early and mid-2023, buyer demand has softened again, as mortgage rates remain high and expectations of interest rate cuts by the Reserve Bank get pushed further into the future.

Chart 1 shows that the stock of housing for sale on realestate.co.nz has increased 23% since July last year, to its highest level since 2015. The biggest lifts have been in Wellington and Wairarapa (up 43% and 35% respectively), as the spectre of public sector job cuts has hung over the lower North Island. Other regions with increases of 30% or more over the same period are Auckland, Bay of Plenty, and Coromandel – areas where affordability metrics remain highly stretched given the current combination of house prices and mortgage rates.

Vendors are hardly being drawn back into the market by improved prospects for sales prices – after a 3.0% lift between April and July last year, REINZ’s house price index has gone sideways over the last six months. Instead, higher numbers of new listings and the increased stock of property for sale suggest that more people are struggling with larger mortgage payments, and looking to unload property before the bank sells it from under them. This inference is consistent with Reserve Bank data showing that the proportions of non-performing and overdue mortgage lending have trended upwards since mid-2022 and are now at their highest levels since 2013 (see Chart 2).

Anecdotally, the extra bite from increased mortgage rates over the last six months has come as highly indebted households have burned through their cash reserves and are struggling to meet their increased payments, with mortgage rates of 6.5% or over. Some homeowners or investors will previously have been able to put cash aside while they were on lower fixed mortgage rates (with this saving occurring because banks generally have tight limitations on additional repayments on fixed-term loans).

These savings will have tided people over for some months after they were forced to refix at higher rates, providing some buffer time. But with expectations for monetary policy settings continuing to push towards interest rates staying higher for longer both here and abroad, mortgage rate relief is taking longer to materialise. Chart 3 shows that, currently, only people rolling off one-year rates or shorter can refix at a lower rate than they have previously been paying – and then essentially only if they’re willing to fix for three years or longer.

However, taking a longer-term fixed rate is not what people want at the moment. With mortgage rates looking like they’ve peaked, a record 69% of new fixed lending in the latest two months has been for terms of six or 12 months (see Chart 4, noting that data is only available back to April 2021). That figure was down at 39% as recently as October 2023, when terms of between 18 months and three years were much more popular.

People are betting on interest rates coming down, and they do not want to get stuck on rates above 6.5% out until 2027 and beyond. The experiences of 1998 and 2008 show, if longer-term mortgage rates are the cheapest on offer, that is precisely the time you don’t (generally) want to be fixing for five years! But with domestic inflationary pressures looking like they’re stickier and more persistent than headline inflation, interest rate relief for the housing market will still be limited this year.

The combination of high mortgage rates, a weakening labour market, and constrained buyer numbers suggests that vendors will have to work hard to secure a sale throughout the next 12 months. Competition for securing a sale is high with the number of houses on the market at present. Buyers are aware they have options, can shop around, and can bid down prices (to a degree) to ensure that they buy from one vendor and not another. That all means that well-presented and realistically priced properties will have the best chance of selling, but homes that fail to meet both those criteria are likely to put buyers off and end up sitting on the market for a long time. As a result, we continue to expect limited house price growth in 2024, despite large population gains, with interest rates trumping demographic demands.