For decades, New Zealanders became accustomed to property growth averaging around 6–7% a year, with the idea that house prices could double roughly every decade. But according to Nick Goodall, Head of Research at Cotality, some of the forces that drove those returns have fundamentally changed, making 3% property growth a potentially more realistic long-term expectation.
Why property growth could look different from the past
New Zealand has experienced significant property growth over the past four decades, but Nick says some of the conditions that helped drive it are unlikely to be repeated.
One of the biggest was the long-term decline in interest rates. Moving from interest rates around 20% to around 5% significantly increased how much households could borrow, helping push property prices higher. That same structural shift can’t simply happen again.
Debt-to-income restrictions could also limit how much investors can borrow and how frequently they can purchase. At the same time, changes to land use have allowed more housing to be built on the same amount of land, reducing some of the constraints that previously contributed to rising land values.
Nick also points to the shift towards two-income households. Moving from one to two household incomes significantly increased borrowing capacity, but that is another major change that can’t simply be repeated.
Together, these factors suggest the conditions that supported historic levels of property growth have changed.
Is 3% property growth a realistic long-term expectation?
For investors looking at property growth, Nick believes expectations may need to move closer to income growth rather than the 6-7% annual increases seen historically.
He sees somewhere around 2-4% as a reasonable long-term range, with approximately 3% a useful figure for investors to base their numbers on when capital growth forms part of their strategy.
That doesn’t mean every property will increase by 3% each year. There will be cycles where growth is higher and periods where it is lower. Different regions will also perform differently.
For an investor relying on capital growth, however, the numbers may need to work at around that 3% mark rather than relying on the much stronger growth experienced in previous decades.
Housing affordability is back near long-term averages
While property growth may be slower in the future, Cotality’s figures show affordability has improved significantly from the extremes of 2021.
The house value-to-income ratio has fallen from around 10 to below seven. More importantly, the proportion of gross household income required to service a mortgage has fallen from a peak of around 54% to approximately 40% – compared with a long-term average of 42%.
Nick says house prices falling initially helped affordability, but rising interest rates offset much of that improvement. More recently, relatively flat house prices, growing incomes and lower interest rates have brought mortgage affordability back towards longer-term levels.
That creates an underlying level of demand, but affordability alone hasn’t been enough to kick-start significant price growth.
So what is holding the property market back?
Confidence remains one of the biggest factors.
Nick says some buyers remain cautious after seeing people purchase near the 2021 peak and subsequently lose significant value. Even those who weren’t personally affected may know someone who was, creating uncertainty around whether now is the right time to buy.
Job security is another major consideration. Until people feel more confident about their employment and the wider economy, they may be less willing to make a major financial commitment such as buying a property.
Economic growth, unemployment and underemployment are therefore key indicators Nick is watching. As businesses become more confident and begin investing and hiring again, that could flow through to greater confidence among potential property buyers.
New Zealand isn’t one property market
National house price figures only tell part of the story.
Nick points out that New Zealand is made up of many individual property markets, and different regions are experiencing very different conditions. While Auckland and Wellington remain well below their previous peaks, Invercargill has reached a new peak.
More affordable markets connected to the agricultural sector have also generally performed better. Where industries are performing well, employment feels secure and incomes are strong, people may be more comfortable making large purchases such as property.
That makes understanding the local economy increasingly important when deciding where to buy.
Nick cautions against buying somewhere simply because it appears undervalued compared with historical averages. Understanding what could support the local economy and housing demand over the next decade is an important part of assessing a market.
What Cotality’s Pain and Gain Report tells us
Cotality’s latest Pain and Gain Report found that 87% of properties sold during the second quarter made a nominal profit compared with their previous purchase price, while 13% sold at a loss.
Nick says many of those selling at a loss had owned their property for around four or five years, meaning they were more likely to have purchased near the 2021 peak.
That compares with fewer than 1% of properties selling at a loss around the peak of the market, when rapid house price growth made it difficult to sell for less than the original purchase price.
However, Nick notes that current conditions aren’t as severe as those experienced during the Global Financial Crisis, when the proportion of properties selling at a loss was higher.
Why location still matters for townhouses
As New Zealand intensifies its housing stock, townhouses, duplexes and other smaller dwellings are likely to remain an important part of the market.
Nick’s view is that location remains one of the biggest differentiators.
Well-built townhouses in desirable areas with good transport connections, schools, amenities and access to employment can perform differently from large developments further from major centres where underlying demand is weaker.
The same principle applies to standalone homes. Understanding why people want to live in a particular location remains an important part of assessing property.
What slower growth could mean for property investors
If investors can no longer rely on the same levels of capital growth, rental yield and the ability to add value become increasingly important.
Nick says investors need rent to cover more of their ongoing costs if capital growth is lower. There may also be opportunities to improve older properties through renovations that make them more attractive to tenants and potentially increase the rent they can command.
Even relatively modest growth can compound over a long investment horizon. But investors may increasingly need to consider how property stacks up against other potential investments, particularly once the responsibilities and costs of owning a rental property are taken into account.
Key takeaways
- Nick Goodall, Head of Research at Cotality, believes long-term property growth could sit around 2-4%, with roughly 3% a reasonable figure for investors to base their numbers on.
- New Zealand property growth has historically averaged around 6-7%, but several of the conditions that drove those returns have fundamentally changed.
- Mortgage affordability has improved, with servicing costs falling from around 54% of gross household income at the peak to approximately 40%.
- Confidence, employment and economic growth remain important factors holding back stronger housing demand.
- New Zealand is made up of many different property markets, meaning local economic conditions can have a significant influence on performance.
- Cotality’s latest Pain and Gain Report found 87% of properties sold for more than their previous purchase price, while 13% sold at a loss.
- Location and underlying demand remain important when assessing townhouses and other property types.
- If capital growth is lower, rental yield and the ability to add value could become increasingly important for property investors.
Next steps
If you’re considering buying property, speak with the Lighthouse Mortgages team to understand your borrowing position and whether a property fits your wider financial strategy.
If you’d like to watch more, check out this episode below.
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