New Zealand Home Prices to Rise Amid Supply Constraints and Economic Woes

New Zealand home prices are predicted to rise this year and next due to tight supply, despite high interest rates and a weak economy. Analysts suggest that while home affordability has improved, the lack of supply continues to drive prices up. The government has announced measures to boost social housing, but challenges remain.

New Zealand home prices are forecast to rise this year and next as tight supply offsets the drag from high interest rates and an economy struggling to pick up meaningfully, a Reuters poll of property market experts found.

Following aggressive Reserve Bank of New Zealand rate hikes, house prices in one of most expensive housing markets among OECD countries have fallen as much as 15% from their late 2021 peaks after rising more than 40% during the COVID-19 pandemic. But first-time buyers have not been able to make the most of the improved affordability and the government policy support of recent years as the lack of supply has kept house prices buoyant.

Median forecasts of 10 property market analysts taken May 10-29 expected home prices to rise 4.5% this year and 5.1% in 2025, similar to the 4.8% and 5.0% predicted in a poll taken last quarter. "Looking ahead, the surge in migration demands more supply. The shortage in affordable dwellings is getting worse. If the RBNZ claims victory in the war against inflation, and starts cutting interest rates, then the housing market will recover faster," said Jarrod Kerr, chief economist at Kiwibank.

The latest home price forecasts come despite slipping expectations for rate reductions, and are in line with the central bank's own expectations for house prices and the long-run average. Economists have pushed back expectations of a rate cut to the fourth quarter from the third quarter previously as inflation pressures persited despite a weakened economy. The cash rate has been at a 15-year high of 5.50% since May 2023.

The central bank recently reported housing listings have increased, but sales volumes have fallen, resulting in a larger stock of houses and making the outlook uncertain. It also said ongoing high net immigration and lower interest rates next year will support a recovery in house prices and building activity.

Six of seven analysts who answered an additional question said the pace of supply of affordable homes in New Zealand over the coming two to three years will fall short of demand. And nearly all of those polled said the government should be more involved in increasing the supply of affordable homes.

This month the government announced it would fund 1,500 new social housing places, which is part of a subsidised housing plan. However, it may not be enough to improve affordability for first-time homebuyers, analysts said. The economy, already in a recession, was not expected to do much better this year. Economic growth was expected to average 0.8% in 2024 and 2.2% next year, a separate Reuters poll showed.

"As the labour market continues to loosen, concerns over household income are likely to become a larger driver of housing market outcomes than they have been over the past couple of years," said Sharon Zollner, chief economist at ANZ. (Other stories from the Reuters quarterly housing market polls are here)

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