The RBNZ’s monetary policy committee says house prices appear to have stabilised and its projection for house prices to lift by about 3 per cent next year is reasonably balanced, remaining around estimates of sustainable levels.

Westpac is predicting house prices will rise by 8 per cent over the next year.

While the RBNZ had previously expected house prices to continue falling through the back part of this year, prices have instead flattened off in recent months. It says the predicted rise in prices will help support household spending.

The committee says higher interest rates have contributed to lower demand for housing, with house prices falling 15 per cent from their peak in November 2021 to March 2023.

“Stronger net immigration, alongside a peak in interest rate expectations, has occurred at the same time as house prices have started to stabilise and are now assumed to have reached a trough earlier than expected.”

Cash Flow

Higher mortgage rates have, however, increased debt servicing costs for households, but the lagged impact of recent increases in mortgage rates has yet to impact household cash flow fully, the committee says.

This reflects the yield on total mortgage lending which is expected to increase by 1 per cent over the coming 12 months as borrowers roll onto higher interest rates.

Lower house prices also tend to lead to reduced spending by households as they feel less wealthy and have less borrowing power, contributing to lower discretionary spending on durable goods such as household appliances over recent quarters.

The committee says, however, the earlier-than-expected stabilisation in house prices is assumed to support household consumption over the next three years, somewhat offsetting the dampening impact of overall lower house prices.

Interest Rates

Lower housing demand has also reduced home building over the past year. Higher interest rates have made borrowing for housing more expensive, and lower house prices – particularly when construction costs are high – have made residential housing development less attractive.

The number of new residential building consents has fallen over recent quarters, indicating a substantial slowdown in residential building activity ahead, the committee says.