Cost of living: Amount Kiwis are borrowing to buy a house drops amid tumbling prices

The value of new home loans has dropped significantly as house prices tumble, new data shows. 

Data from the New Zealand Banking Association, released on Monday, shows new home loan values have dropped 18.9 percent in the six months to last December. 

The drop comes as borrowers face steeply rising interest rates and falling house prices across the country. 

NZBA chief executive Roger Beaumont said the drop is some positive news at a time when many Kiwi households are struggling with high inflation and relentlessly increasing living costs.

"Many households are doing it tough in the face of the rising cost of living. Added to that are rising interest rates for those with home loans. Our latest information provides some positive notes on how households are managing through the current challenges," Beaumont said. 

The average value of new home loans is now $338,598, which Beaumont said is a reflection of falling house prices

"So, while the Reserve Bank is raising the cost of borrowing to help fight inflation, people are starting to borrow less. 

"That's also a reflection of the property market, which saw residential property values across New Zealand decrease on average by 7.2 per cent in the year to February," he said. 

Of the nearly 1.26 million home loans across 1.09 million customers, the average value is $316,019. Of the 45,628 new home loans opened, 26.1 percent were issued to first-home buyers, the data shows. 

The data also shows many Kiwi households were taking advantage of interest rates when they were low and paying more than they needed, which somewhat cushioned them from recent Official Cash Rate (OCR) rises. 

"In this period, we saw almost 45 percent of home loan customers ahead on their loan repayments. That's slightly down on the previous six months. It shows that many people took advantage of interest rates when they were at historic lows," Beaumont said. 

"They likely retained their repayments at the same level as before, or increased them, to help repay their loans faster and save on the overall loan cost. It also means that nearly half the people with home loans had built in a buffer that has effectively cushioned the impact of higher interest rates, which we're now seeing. It's a double win for them."

He said a very small number switched to interest-only repayments in that timeframe.  

"It's also interesting to see that 12,120 home loans switched from principal and interest to interest-only repayments. That's just a small fraction - less than one per cent - when compared to the total number of home loans.

"We've also seen a drop of nearly 10 percent in home loans on variable interest rates, which suggests borrowers are looking for more certainty in the current market. Now around 17 percent of home loans are on variable rates."

It comes as the country grapples with stubbornly high inflation of 6.7 percent - down slightly from its peak of 7.3 percent in the June 2022 quarter. High inflation prompted the Reserve Bank of New Zealand to hike the OCR from its low of 0.25 in August 2021 to 5.25 this April. The changes have seen the average house price drop from its high of $1.063 million in January 2022 to $907.737 in March this year.