Housing affordability unlikely to return to pre-COVID-19 levels - BNZ

Housing affordability is unlikely to return to levels seen before the COVID-19 pandemic since it's difficult to claw back affordability in the wake of a house price boom, BNZ warns.

The latest Eco-Pulse report from the bank's chief economist Mike Jones said New Zealand's housing affordability index is projected to drift roughly sideways as expectations of solid income growth and eventual mortgage rate relief run into higher house price expectations.

He said that represents a "clear flattening" of BNZ's previous assumption that affordability would stay on an improving trend, adding that stretched affordability will be a key factor limiting the extent of house price gains next year.

"That the housing market has turned a corner is increasingly old news. National house prices stopped falling in March, according to the monthly REINZ House Price Index (seasonally adjusted). Over the past three months that we have data for (May-July) we've seen consecutive increases," Jones wrote.

"The odds are that this tentative uptrend will be sustained, in some shape or form. When housing momentum turns, it tends to stay turned. Back in early June, we forecast a 3 percent lift in house prices over the second half of this year, followed by a 7 percent lift through next year. We've seen nothing in the run of play since to throw us off this view."

Housing affordability has continued to improve and BNZ's index is up around 10 percent from peak unaffordability in December 2021. Most of this reflects the fall in house prices over that time, Jones said, and strong income growth has helped this too.

While Auckland has had the largest affordability recovery, it still remains the most unaffordable market overall. Meanwhile, Canterbury has changed little thanks to an outperforming housing market and Otago now matches Wellington in the unaffordability stakes.

"Our prior expectations of continued improvement in housing affordability have been flattened. Not completely, but based on our projections for income growth, house prices, and mortgage rates, the speed of any improvement over 2024 looks glacial," Jones said. "Firmer house price expectations, and hence higher deposit requirements, have done most of the damage here relative to our last affordability update in December."

While BNZ's expectations of a strong but slowing household income growth and some mortgage rate relief are enough to hold back the higher house price tide over 2024, 2025 is a different story and affordability starts to deteriorate again. 

There are a few scenarios BNZ has looked at to see what could happen if some forecast variables are changed.

The first situation is where house prices grow at double their expectations through 2024 (+14 percent) and pulls affordability back down to near the December 2021 lows.

The second considers a situation where the Reserve Bank delivers early 2024 interest rate cuts and provides a small boost to affordability, relative to their 'central' assumption.

Then there's the "unlikely goldilocks scenario" where household income growth holds at a healthy 7 percent and house prices flatline for the next two years. This would see their affordability index roar back up to above pre-COVID-19 levels. 

"It highlights, again, how difficult it is to claw back affordability in the wake of a house price boom," Jones said.

"Stretched affordability will be a key factor limiting the extent of house price gains next year (we forecast a 7 percent lift). Still high mortgage rates and a slackening labour market are the other factors expected to keep a lid on things."

Earlier this month, experts said New Zealand house prices are showing signs of rising again and the softening market could be bottoming out.

ASB believed the market was "essentially at a trough now and is set to start warming up again" and some data series show prices lifting slightly over the past couple of months.