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Will Australia’s housing ills send waves across the ditch?

Tags: Residential Residential Views

Falling property prices across the Tasman have left many in our housing market asking if the impact will soon be felt in New Zealand. A leading analyst thinks not.


Melbourne and Sydney have been particularly affected by challenges in the housing market across the Tasman, and Fitch Ratings has predicted that Australia’s housing market will be the worst performer out of 24 countries for the second year running.

Australian prices have already fallen 6.7 per cent since their peak and Fitch said this was mostly due to lower investor demand thanks to tougher restrictions on lending.

With a household debt-to-GDP ratio of 121 percent in Australia, Fitch predicts that house prices there will drop by another 5 percent in 2019 before stabilising in 2020.

These falls have given rise to the inevitable question on this side of the Tasman: will the downturn spread to the New Zealand market?

Kelvin Davidson, senior property economist at CoreLogic, is not convinced that it will. His analysis is based on three major factors.

“First, New Zealand does not generally have an oversupply of property of any type, or in any region. Indeed, our largest city of Auckland has the opposite problem: a large shortfall of housing, which is propping up values even though property is relatively unaffordable in our biggest city.”

In Australia, on the other hand, it is widely accepted that there are too many apartments available in both the Sydney and Melbourne markets, which is having the effect of dragging down prices.

So-called settlement risk, where a buyer who earlier bought an apartment off the plans suddenly ends up walking away from the transaction, is a growing problem for some of these large-scale developments, says Davidson.

The second key difference he sees is that borrowers in this country have yet to experience the kind of increases in home loan interest rates that home buyers are seeing in other countries, including Australia.

“In fact, although there are now signs that it might be ending, the banks here have recently engaged in a ‘rate war’, with borrowers enjoying some pretty sharp fixed-rate deals in recent weeks.”

At the same time, in the New Zealand market about 80 percent of mortgage debt is on fixed interest rates. This means Kiwi borrowers will have some time to adjust their finances in advance of any interest rate increase being pushed through to their home loan.

“That is in stark contrast to Australia, where floating rates dominate,” says Davidson.

Completing the trifecta of Kiwi advantages highlighted by Davidson is the fact that New Zealand’s regulators have arguably been much more proactive than Australia’s in curbing the riskiest lending practices.

“Interest-only lending is more controlled in New Zealand, and it’s also easy to forget that we’ve actually had the LVR (loan to value ratio) restrictions – in one form or another – here for five years now. This has put our mortgage market on a surer footing than Australia’s.

“To be fair, none of this precludes a housing market downturn here in New Zealand at some stage in the future. But for now, and with the labour market a huge support for property, we’re confident that Australia’s problems won’t be replicated in New Zealand for the foreseeable future.”

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