As property market cools, New Zealand's recent home buyers tighten belts

© Reuters. FILE PHOTO: A newly built housing estate can be seen next to another under construction in a suburb of Auckland in New Zealand, June 24, 2017. REUTERS/David Gray

By Lucy Craymer

WELLINGTON (Reuters) - When Aarti and Gaurav Kathuria were saving for their first home, a three-bedroom townhouse in Auckland, they cut back on eating out and other expenses so they could put together the hefty deposit.

Now, only months after paying NZ$875,000 ($560,000) for a home in one of the world's most unaffordable cities, they're faced with a new challenge: property prices are falling, while mortgage rates and living costs are going up.

The declining property values are a product of policies designed to knock some of the heat out New Zealand's red-hot housing market. But for people like the Kathurias, the hit to household wealth has meant a tightening of the purse strings.

"All you can do is cut back on things," Aarti Kathuria said.

House prices in New Zealand, which were already elevated before the COVID-19 pandemic, jumped 43% in the two years to December 2021, according to the Real Estate Institute of New Zealand said. They've fallen around 1% since December.

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"Over the past 12 months people who have entered in that very heightened house buying frenzy will be challenged," Reserve Bank of New Zealand Governor Adrian Orr said last week, noting most households remain in a strong equity position.

The Kathurias are also trying to save 30% of their income to provide a financial buffer for future costs. With petrol costs and food prices rising, they're catching the train to work, walking to the supermarket rather than driving and renting out a spare bedroom.

Housing affordability has plummeted over the past two years as home prices and debt levels surged, driven by record low interest rates, massive fiscal relief and an inability to spend on overseas travel.

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Analysts at Australian financial firm Barrenjoey said nearly 40% of loans in New Zealand were to borrowers with debt more than six times their income.

UNSUSTAINABLE

The RBNZ, which has to consider house prices in its policy deliberations, began raising the cash rate in October last year, at the time describing house prices as "unsustainable".

It has so far increased the cash rate by 1.25 percentage points and forecast further significant increases.

Last week, Orr told a parliamentary committee that house prices still needed to drop as much as 20% more before they were at sustainable levels.

Some economists now see house prices falling about 10% this year.

While lower house prices would help the government's affordability objectives, the combination of weaker asset values, soaring inflation and higher debt burdens could reduce consumer spending.

This would make it harder for recent homebuyers to repay their loans as interest rates rise.

"A sharp correction remains a plausible outcome that would have broad economic implications," the RBNZ said last week.

The central bank expects that around 50% of those who bought a property in the past 12 months will need to "belt tighten" if mortgage rates hit 7%. Currently major banks are offering a floating mortgage rate of around 5.5%.

Miles Workman, senior economist at ANZ Bank, said recent buyers who borrowed heavily were most at risk of falling into negative equity as prices come down.

"That is going to hurt from a psychological perspective," he said. "Hopefully those first-home buyers can just grit their teeth and get through it because the labour market is very tight."

Economists expect a hit to consumption as the mix of higher loan repayments and rising prices make households cautious about spending.

Westpac's acting chief economist for New Zealand, Michael Gordon, said all of these factors could squeeze the broader economy.

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