There may be many homeowners thinking that with interest rates coming down property prices are going to soar again.  Maybe not in the next 12 months but not far off.  We can’t see that happening.

House price growth is dependent on demand and supply.  Supply usually lags demand as it takes time to carve up land and build properties, just as it takes time to stop the supply when projects are in flight.

Demand is driven by a number of factors.  Population growth, affordability, job confidence, the rent vs buy trade off.
Property often goes through cycles where there is high growth followed by drops in value, followed by moderate growth, followed by high growth.
In the graph below you can see growth of median Wellington property values went from $185,000 in January 2000 to $365,000 in January 2008.  That’s 12% average growth per year over that period.  The following 8 years saw property prices go from a median price of $365,000 to $394,000 in 2018 which is an average 1% growth per annum.

 

Source: Wellington house prices | Opes Partners


Every region will have its own idiosyncrasies.  Wellington has become a government town after many corporations moved to Auckland during the timeline in the graph, including Fonterra.  This brings us to our first reason why we’re going to see moderate growth for the near future:

• Job confidence.  People generally only take on large debts when they feel secure about their employment.  Certainly, Wellington has been heavily hit by job losses in the government sector.  This also correlates to the National government being in power between 2008 and 2016. Unemployment is expected to increase in the near future as business grapples with less expenditure while trying to hold onto staff.  Those that are still employed may find they go onto lower pay than they have been on through restructures.  Which brings us to affordability.
• Affordability.  According to stats.govt.nz, inflation rose 16.6% from June 2021 to June 2024.  Has your income gone up by that much during that time?  Median house prices in Wellington rose 46% between June 2020 and October 2021.  $685,000 to $1,000,000.  They have since dropped by 21% to $793,000.   Interest rates also have a bearing on affordability.  However, after the spendathon that went on after the COVID induced low interest rates, the Reserve Bank has introduced debt to income ratios. (DTIs).  Consumers were able to borrow 8 times their income during that time.  No matter what happens with rates now, consumers won’t be able to borrow more than 5-6 times their income.
• Rent vs buy.  A $793,000 home costs $1075 to service a 95% loan at 6.29% over 30 years.  Add another $100 per week for rates and insurance (this will vary across the country).  When you search for a 3 bedroom property to rent you find properties from $665 to around $1000 per week.
• Net Immigration is easing, down from 133,000 to 45,000.  Less people are coming, and more people are leaving.

 
There are no signs that property is going to be in great demand anytime soon.  The rent vs buying option you can sort of ignore.  Buyers tend to gravitate to property even if it is slightly higher in weekly costs as it provides security and potential for gains.

Affordability is the biggest issue.  Incomes have been eroded due to inflation, combined with job uncertainty, there isn’t going to be much growth in the near future.  Wellington is going to be the slowest to recover with dependency on central government jobs.

The bright light in all of this, is that if you are currently out of the property market and can afford to buy, are confident with your employment, you should get in while you can.  Even moderate growth of 4% on a $793,000 property is $31,720 in year 1.  Can you save that in a year?
 

Disclaimer: This newsletter is meant to be informative and engaging, hopefully not a cure for insomnia.  Please don't take this as personalised financial advice.  Discuss your situation with an Advisor.  This is where I need to say past returns are no guarantee of future returns.