Auckland and Wellington’s Housing Crash: Beyond the Headlines and What’s Next
Auckland and Wellington homeowners are facing a reality not seen since the Global Financial Crisis – and in some respects, it’s worse. Recent data reveals a staggering 27.3% drop in Wellington City house values and a 19.7% decline in Auckland since the peak of the market in January 2022. This isn’t a correction; it’s a significant downturn with far-reaching implications for the New Zealand economy, and it’s a situation the Reserve Bank once feared in its worst-case scenario planning.
The Scale of the Slump: A Historical Perspective
To put this into context, the average national house price fell around 5% after the GFC in 2008. However, economists Arthur Grimes and Sean Hyland from Motu Economic and Public Policy Research have calculated that, adjusted for inflation, house prices actually fell 15.3% between 2007 and 2011. The current declines in Auckland and Wellington are already exceeding that level in real terms, signaling a potentially deeper and more prolonged crisis. Infometrics’ Gareth Kiernan points out that current price drops are dramatically larger than those experienced at similar stages of previous property cycles.
The ‘Phoney Boom’ and the Pain of Negative Equity
While some argue the 2022 peak was artificially inflated by Covid-era stimulus measures – a “phoney boom” as some have called it – that doesn’t lessen the pain for those who bought at the top. Data from Cotality shows the number of homeowners selling at a loss is at its highest level since 2014, with Auckland sellers particularly hard hit. The reality of negative equity – owing more on a mortgage than the property is worth – is becoming increasingly common, and the threat of mortgagee sales looms for some.
Beyond the Banks: The Wider Economic Impact
Interestingly, the banking system has proven remarkably resilient. Stricter lending criteria, including loan-to-value (LTV) and debt-to-income (DTI) ratios implemented after the GFC, have largely shielded banks from significant losses. However, the broader economy hasn’t fared as well. New Zealand has become overly reliant on property market growth, and the current slump is exposing that vulnerability.
Auckland, in particular, is feeling the pinch. Its economy is heavily weighted towards property-related services – construction, renovation, landscaping, and more. With the housing market slowing, these sectors are facing significant headwinds. The city’s reliance on this sector is exacerbated by a comparatively weaker manufacturing base and a tourism industry still recovering from the pandemic.
Regional Disparities: A Tale of Two New Zealands
It’s not a uniform picture across the country. While Auckland and Wellington are experiencing substantial declines, other regions, such as Canterbury, Queenstown, Southland, and the West Coast, have shown more resilience, with some even exceeding their 2022 peaks. This regional divergence highlights the localized nature of the housing market and the varying economic conditions across New Zealand.
What’s Driving the Downturn and What’s on the Horizon?
Several factors are contributing to the current slump. Rising interest rates, aimed at curbing inflation, are making mortgages more expensive and reducing buyer demand. A cooling economy and increased cost of living are also impacting consumer confidence. The REINZ house price index recently reported a 0.5% fall in July, led by a 1.2% drop in Auckland, and the stock of unsold homes in Auckland is rising.
The good news? The Reserve Bank is beginning to ease monetary policy. Further Official Cash Rate (OCR) cuts are expected, potentially providing some relief to borrowers and stimulating demand. However, economists are divided on the extent of future cuts. While lower rates will eventually provide some support, a rapid return to the boom times of 2021 is unlikely.
The Need for Economic Diversification
This downturn presents an opportunity – albeit a painful one – for Auckland to diversify its economy. While the tech and film industries are growing, they aren’t yet large enough to offset the decline in property-related activity. A long-term strategy focused on fostering innovation, attracting investment in other sectors, and building a more resilient economic base is crucial.
The challenge lies in finding a “sweet spot” – avoiding a dramatic bounce back that would simply repeat the cycle of boom and bust, while also providing enough stimulus to support construction and economic growth.
Ultimately, the future of the New Zealand housing market, and the broader economy, hinges on a delicate balance between monetary policy, economic diversification, and a shift in cultural attitudes towards property. The current situation demands a pragmatic and forward-thinking approach to navigate these challenging times.
What are your predictions for the Auckland and Wellington property markets over the next 12-18 months? Share your thoughts in the comments below!
