Why one property economist says mortgage rates may have reached peak amid declining house prices

One property economist has said mortgage rates may have reached their peak, suggesting the beginning of the end of the housing market downturn.

CoreLogic NZ has released their Housing Chart Pack, a monthly update on the country's residential housing market, which noted the stabilisation of mortgage rates is one of several market indicators signalling a possible end to the country's extended property downturn, despite the recent official cash rate hike.

Average property values fell 2.4 percent in the March quarter, taking the annual decline to 10.5 percent, surpassing the worst point of the Global Financial Crisis, CoreLogic found.

Wellington recorded a 20 percent drop in average property values in the 12 months to March, the largest of the main centres. While Christchurch experienced the most marginal falls, declining 2.9 percent for the same period. Auckland fell 13.1 percent in the 12 months to March.  

NZ property values 12 month changes.
NZ property values 12 month changes. Photo credit: CoreLogic

Sales volumes have also been hit hard, recording a 30.9 percent decrease in the 12 months to March.

There were 7680 new listings over the four weeks ending April 9 compared to 10,907 for the same period in 2022, the report found. However, the total stock on market is 36,172, well above the five-year average of 30,803. 

But despite these falls in house prices and subdued property activity levels, CoreLogic NZ chief property economist Kelvin Davidson said the market fundamentals are not as weak as they have been.

"Value trends remain weakest in the North Island, with parts of Canterbury and the West Coast still recording some modest increases," Davidson said in a statement.

"Yet there were also hints in the sales data for March that the worst may now have passed for activity, and with new listings flows each week still very low, the total stock of property available for sale on the market is now just showing the first signs of tightening a little."

Davidson doesn't rule out further price falls in the short-term but said the little movement among banks and lenders to pass on the most recent official cash rate (OCR) rise suggested "mortgage rates may have reached their peak".

Davidson said this allows borrowers to quantify their "worst case" scenario for mortgage rates. 

"Any suggestion that interest rates have topped out will provide buyers and sellers with more confidence and is eventually likely to result in a turnaround in housing sentiment," he said.

Earlier this month the Reserve Bank (RBNZ) raised interest rates by another 50 basis points, setting the OCR at 5.25 percent.

In response, Westpac and ANZ lifted their mortgage rates. However, ANZ said it was expecting a lower 25bp increase to the OCR next month and for the baseline interest rate to peak at 5.5 percent.

"When you also consider continued high employment levels – and employers wanting to retain current staff at all costs – rising net migration, and the possibility that some investors could start to return to the market as they try to pre-empt debt to income ratio caps next year, there's a growing sense that the market's downturn could end in the second half of 2023," Davidson said. 

"Of course, uncertainty remains high. But there does now seem to be light at the end of the tunnel."