The latest Reserve Bank mortgage data shows investors nearly overtook first home buyers for the first time in three-and-a-half years when taking out loans in July.

Annual growth in mortgages to investors bounced 60.1 per cent, compared to 14.3 per cent for first home buyers.

On a monthly basis investors took $1,366 billion, or 20.5 per cent, of the total $6.7 billion taken out in mortgages over July. This was up from $1,047 billion, or 18.6 per cent, in June and also up from $854 million, or 17.1 per cent, from the same month last year.

While this was the highest percentage for investors since March 2021, it’s still a long way off the 35 per cent of mortgages lent to them in 2016.

In comparison, the share of new mortgages to first home buyers in July was just above investors at $1,415 billion. For the past two-and-a-half years first home buyers have borrowed more than investors.

However, from a peak of 25.2 per cent of all mortgages in December last year, this number has been dropping to just 21.3 per cent last month. This was down marginally from 21.6 per cent in June but is also an annual decline from 24.8 per cent in July last year.

Arresting dive in house prices

Meanwhile, BNZ chief economist Mike Jones, in his latest Property Pulse report, says he doesn’t expect dropping mortgage interest rates to fuel an immediate lurch in higher housing prices, but they will prevent them diving further.

Despite this, the BNZ expects a seven per cent lift in prices over the next year following a pancake performance this year.

Interest rates aren’t the only game in town and there are also timing considerations to think about, Jones says. “We do expect housing demand and sales activity to lift. But rather than squeezing house prices higher this extra demand will, in the first instance, be directed more towards working off the excess inventory overhanging the market.”

Anecdotal evidence points to a lift in prospective buyer enquiry and confidence.

“No doubt some of this reflects borrowing capacity estimates getting a small uplift and people being able to draw a line under prior concerns that interest rates may yet go higher.”

Still, overall Jones says the bank sees recent falls in mortgage rates as more about preventing a deeper correction in house prices than providing the fuel for a lurch.

First, there are the lags to think about, he says. “Our rough rule of thumb suggests changes in mortgage rates can take six months or so to feed through to house prices. It’s far from an exact science but provides a reasonable directional steer.”

Market oversupply

The immediate issue confronting the housing market is oversupply. There are about 32,000 listings on the market – a nine-year high equivalent to about six months’ worth of sales. Contrary to some commentary, they’re still only running at about an average pace, Jones says.

Smoothing through the monthly ups and downs, the pace of house sales is still tracking 20- 25 per cent below the 2015-2021 average. These dynamics have seen the ratio of sales/listings (a good barometer of overall market balance) tip further into oversupply territory, indicative of downward pressure on prices.

The small fall in the REINZ House Price Index over the month was the third in a row (seasonally adjusted). It’s now been 15 months since the market bottomed in April 2023.

Over that period house prices have ground a net 1.7 per cent higher.

“We do expect housing demand to gradually lift from here, helped in no small way by falling mortgage rates. But rather than putting upward pressure on prices, this extra demand will, in the first instance, be directed more towards working off the supply overhang.”

There are also a couple of demand drivers blowing a little harder in the other direction:

• The prior population boom is in the process of deflating. Monthly net migration flows have slowed from a flood to a trickle, reducing (annualised) population growth from three per cent-plus to sub-one per cent. This has coincided with a draining of excess demand in the rental market, indicative of reduced pressure on housing resources generally.
• Late cycle economic pressures remain intense. This is not something usually associated with rising house/asset prices. While economic activity may be in the process of stabilising, labour market conditions – wage growth, job security, and employment opportunities – are likely to continue deteriorating through most of next year. With house prices already unaffordable, this is likely to further hold back housing enthusiasm.

Jones says pulling it all together, the bank’s best guess is that house prices will continue to shuffle broadly sideways through to about the end of the year.

“Our house price inflation forecasts for calendar 2024 are flat. Around the turn of the year, we see an ‘average’ sort of upturn taking hold as lower mortgage rates and a more supportive policy backdrop bolster demand.”

The bank continues to forecast a seven per cent lift in house prices through 2025, but there is significant uncertainty attached to these projections.