‘Crazy’ post-Covid housing market boom repeat unlikely, say experts

Sunday, 2 March 2025

The market is likely to be quiet and house price growth moderate, which isn’t a bad thing, property commentators say.

It was in October that property developer Chris Johnston first noticed signs the housing market might be starting to pick up.

Buyer interest and enquiry rose, and ‒ crucially ‒ sales began to increase.

But Johnston, who is executive director of Grafton Downs Limited which is developing the master-planned 300ha Paerata Rise subdivision north of Pukekohe, was not certain it would last.

That’s because back in late 2023 activity improved, and the market downturn was said to be over. It wasn’t, with sales activity soon dropping off again.

“Economists like to say they are seeing ‘green shoots’ coming through, but the question is will those shoots grow or wither?” he says.

Improved sales activity has given property developer Chris Johnston confidence to start the next stage of his development.

This time activity has continued to improve over subsequent months, and the most recent OCR cut will boost that as it allows buyers to finance bigger loans, he says.

“Now, we have enough data to give us confidence to move forward with the next stage of the broader development, and we also have 25 new builds underway.

“There’s a scarcity of new builds, and sections out here, so that will lead to more pressure for buyers. But FOMO is not at play ‒ it’s very different to the Covid era market.”

Housing market data over recent months supports Johnston’s view. It shows a slow but consistent rise in sales activity, even in the traditionally quiet month of January.

There were 3774 sales nationwide in January, a 17.5% increase from 3212 at the same time last year, the latest Real Estate Institute figures show.

Jen Baird, the institute’s chief executive, says agents were reporting strong open home volumes across the country, and buyers were showing a positive sentiment.

And the latest ASB Housing Confidence survey found the number of people who expected house prices to rise was around the level seen in the Covid-era boom, at a net 33%.

At the same time, a net 23% of respondents think now is a good time to buy a house, the highest level since October 2012.

In January, house sales nationwide were up 17.5% from the same time last year, Real Estate Institute figures show.

But commentators say while the market is improving, those hoping for a return to the halcyon days of the 2020 to 2021 market boom, when house prices skyrocketed, are likely to be disappointed.

Rather, the market is likely to be quiet and house price growth moderate, and that’s not a bad thing, they say. Confused? Here’s what it all means.

Why won’t house prices take off again?

CoreLogic chief property economist Kelvin Davidson says the outlook for the market is subdued, and the Reserve Bank recently downgraded its price growth projections for this year and next to 3% to 4%.

The reason for this is that there are conflicting forces weighing on the market, he says.

“On one hand, mortgage rates are getting lower, but on the other confidence is still lacking and jobs are being lost, and that’s never a favourable environment for property.”

Affordability has improved slightly, but not much, and the amount of homes listed for sale is at a six to seven-year-high, which means buyers have lots of choice, and it is a buyers’ market, he says.

Adrian Orr takes questions around the latest OCR reduction.

Won’t those falling mortgage rates recharge the market?

Mortgage rates are a critical market driver, and the impact of the latest rate cuts should flow through quickly because about 50% of mortgage holders are due to refix in the next six months, Davidson says.

“But there are restrictions on credit, with loan-to-value ratios (LVRs) in place, and debt-to-income ratios (DTIs) now at play too. So lending might be cheaper, but it can be quite hard to get.”

Opes Partners property economist Ed McKnight says while the Reserve Bank has changed its OCR track to bring forward cuts, a lot of the interest rate drops have already been priced in by the market.

That means the “phenomenal” rates fall seen last year, where rates dropped from around 7.5% to around 5.6%, will not be repeated, he says.

“People shouldn’t expect to see more steep cuts, such as another 2% off the one year fixed rate. We don’t expect that rates will fall to the 3.5%, or even the low 4% mark.

“They are likely to end up in the higher 4% range, and we are not far off that now, with every single bank offering a 4.99% two year rate, for example.”

But don’t house prices always go up?

People shouldn’t expect to see mortgage rate falls as steep as last year’s, Opes Partners’ Ed McKnight says.

There’s a popular belief that house prices double every decade, but recently released Realestate.co.nz data shows that is not necessarily the case.

However, Realestate.co.nz also found prices do grow strongly over time, despite market fluctuations, while CoreLogic’s pain and gain reports make it clear the vast majority of property resales make a profit.

What makes this particular market cycle a bit different is the lingering impact of the Covid era boom, and the massive increase in prices that occurred.

CoreLogic’s latest figures show that while the national median price has fallen 17.5% to $803,819 from the January 2022 market peak of $974,251, it is still 16.3% above the pre-Covid level of March 2020 ($691,331).

Both Davidson and McKnight describe the Covid-era market as “crazy”, and say the market is still returning to a more normal equilibrium.

Simplicity chief economist Shamubeel Eaqub says the “extremely unusual” Covid-era boom was driven by the Reserve Bank’s mistake in loosening up lending criteria too much.

Interest rates may have dropped, which gives borrowers relief, but no-one is saying “you can borrow as much as you want at 2.5%”, he says.

The housing market might be rebalancing, but it is not normal, economist Shamubeel Eaqub says.

“Lessons have been learned, and we should not think that interest rates will fall that low again in the foreseeable future, unless there is a catastrophe.”

Is it a bad thing if prices don’t go up much?

The market might be rebalancing but it is not normal because the average house price is still extremely high, and affordability remains a huge issue, Eaqub says.

“When prices fall there is depression, and when they rise there is hopelessness as the market becomes more difficult to access.

“That means it is not a bad thing if price growth remains flat for a while, and there’s a chance for incomes to catch up with prices a bit more, and affordability to improve more.”

But there are likely to be different perspectives on that, depending on whether someone is a homeowner or a homebuyer, he says.

For McKnight, it comes down to consistency rather than volatility. He says that as an investor, he does not want to see massive price jumps and then declines on an ongoing basis.

Instead he would like to see a steady, but sustainable rate of annual price growth.

Government reforms to unlock land supply and increase infrastructure investment aim to help boost housing supply.

“If you average out all the banks’ price growth forecasts for the next year, you get a rate of about 6.5%. That seems a bit high to me, but about 5% seems reasonable, and I’d be happy with 5% growth every year.”

A first homebuyer would not be though, he adds. “They want to see prices stay still or fall so it’s easier to save a deposit and buy.”

What could happen further down the track?

The property market moves through cycles, and Davidson would never say never to another big boom occurring one day.

But the historical drivers for a rapid escalation in house prices are a long downward trend in mortgage rates, restricted land supply, and favourable tax settings, he says.

“In future, tax settings may not be as favourable, land supply could be less of an issue ‒ if the Government is successful in its plans, and we won’t see the same impact from rates because they’re lower already.”

That means there will be less pressure on prices, and if prices do start to rise strongly that is when the DTIs will come to the fore, and they will restrict excess growth, Davidson says.

Another restraining factor could be a change in attitude. Eaqub says recent research shows people might like higher house prices for themselves, but many are concerned about what they mean for New Zealand and especially for young people.

“Those concerns were not in evidence 10 years ago. It’s a positive culture change, and shows a maturing of the market. And that’s how progress happens.

“We’ve had a change of government, and they are still pushing ahead with policies around land supply and infrastructure improvement to try and fix the broken housing market.”

Political parties might differ on the best method to address the issue, but the idea that it needs to be addressed is accepted across government, at a polarised time, and that is encouraging, he says.