Property prices have fallen for the third consecutive month with an economist warning further drops are expected into 2023 as the country faces a "firm correction".
CoreLogic released its latest Property Market and Economic Update on Wednesday which found the combination of sharply rising interest rates and the large wave of refinancing of existing mortgages that will occur over the next year is set to test the property market for the rest of 2022.
Property values have continued to fall around the country for the third consecutive month to an average of $1,018,770, down -2.3 percent from the peak, with annual growth rates slowing to 12.4 percent.
CoreLogic chief property economist Kelvin Davidson said more listings, a shift in pricing power towards buyers, a tighter mortgage lending environment, and higher interest rates are all factors contributing to the slowdown in values.
"This weaker phase for the property market looks set to continue into 2023, and even when the floor is reached," he said.
"The experience of the Global Financial Crisis (GFC) was that it took another two to three years for the next upswing to start as values plateau."
The amount of properties sold around the country has also fallen to decade-low levels, with no signs of improvement for the rest of the year, the data shows.
Davidson said it's been more than a decade since there has been a similar drop in sales activity recorded.
He noted days on the market had also increased as buyers hold the balance of power with plenty of stock to choose from.
"The rest of 2022 and into 2023 looks set to remain a testing time for market activity levels," he said.
"The economy remains a little fragile, net migration could stay relatively subdued, even as the borders fully reopen, and on top of that, credit conditions remain restricted and mortgage rates continue to rise. All of these factors point to further downward pressure on property sales."
As the Credit Contracts and Consumer Finance Act (CCCFA) rules ease, Davidson said more people may have access to credit and enter the market.
But Davidson doesn't believe this is enough to "move the needle significantly", with 2022 total sales projected to be around 78,000, down from 94,000 in 2021.
Davidson said it had been a weak start to 2022 for sales activity and a significant drop in volumes had allowed time for the stock of listings to be replenished but had shifted the balance of power in favour of buyers.
"As yet, there hasn't been an abnormally large rise in new listings flows, but this is certainly a risk we're keeping an eye on as financing costs continue to increase and the returns on other assets rise too," Davidson said.
"The sharp post-COVID upswing in values has now given way to a firm correction, and the falls already seen to date have been spread across most geographical areas and price brackets. It's possible the national average property value will ultimately drop by -10 percent to -15 percent by the middle of 2023, which broadly suggests we're potentially halfway through this correction in both duration and scale."
Davidson said if unemployment levels remain around three to four percent, the market should stay in a correction phase rather than moving into a serious slump.
He said inflation rates, economic health and the official cash rate (OCR) will be the key influences on the property market in the next 18 months.
Davidson warned recession risks were still prevalent and any signs of rising unemployment would have an adverse impact.
"Should the economy start to feel the pinch of tighter monetary policy sooner than the RBNZ expects, the OCR may not need to go all the way to 4 percent, which would also tend to limit the peak for mortgage rates," he said.
"That said, offshore rates also matter too, and the key point is that mortgage rates still likely to have further to rise yet.
"Overall, the property market is clearly in a very different phase than we've seen for several years, with sales volumes low and values falling outright."
CoreLogic's Buyer Classification figures indicate first home buyers and mortgaged multiple property owners remained relatively subdued in the past few months, because of stretched affordability, low gross rental yields, tighter credit conditions and higher mortgage rates.