Housing recovery to continue through 2026
There is a recovery underway in the residential real estate market around New Zealand which can be seen most clearly if we look at property sales. In the year to March 2023 annual sales hit a 12 year low near 59,000 in response to high interest rates and a recession in the economy.
But in the latest year sales reached 79,000 including an 8% rise over the past year in Auckland, 11% gain in Northland, and 12% gain in the Bay of Plenty. Most people are likely to think that the upturn largely reflects falling interest rates since August 2024. They have certainly played a role. But that doesn’t explain the firm uptick from early 2023 which was driven by first home buyers.
Young people have been the most active drivers of rising market activity as they have taken advantage of a strong rise in listings, easing of prices from 2021 highs, opening up of bank lending criteria from back then, and a relative lack of competition from other, generally older, buyers.
In fact, according to data from Cotality, whereas on average 21% of house purchases are made by first home buyers, this number has been trending firmly upward and recently stood at a record near 29%.
With job security set to improve as 2026 advances and interest rates likely to only rise slightly further this year in response to some higher than expected inflation, the question becomes this. Will we see happen this cycle they key thing which has happened in every other cycle over the past three decades – sharply increased buying by investors?
We can see from various data sources that more investors are starting to appear as has been the case for perhaps not just decades but the past century or two. But from the mid-1990s a key development was investor buying by non-traditional investors. These were people driven by official exhortations from the government to build up assets for their retirement.
These calls to save and invest in the 1990s came at the same time as interest rates settled at sharply lower levels from 1992 – encouraging savers to look for assets other than term deposits. Also back then a strong structural lift in net migration flows into the country occurred.
These factors combined with some others to encourage a lot of extra buying by average Mums and Dads and a strong discussion of concepts like FOMO (fear of missing out) and how people were making more from tax free capital gains than wages and salaries. Now, things have changed.
The costs of running a rental have risen (rates, maintenance, insurance), tax rules have altered, and tenants are in relative short supply at a time when many townhouses sit unsold following the pandemic construction binge.
Add in a structural lift in average construction levels and selling by older investors looking to fund a retirement turning out to be a lot more expensive than anticipated and we get a permanent shift in average demand coming from investors.
What are the implications? Positive for young buyers because of reduced competition from investors plus increased supply from older ones cashing out. Listings are plentiful and all buyers are going to experience a less frenzied environment this year in which to make a considered purchase than has been the case for a long time.
A year from now annual housing turnover is likely to be near 90,000 dwellings and improving job security as the unemployment rate falls will see many more existing owner occupiers look to buy then sell or sell then buy.
What about prices? For many years I have made the prediction that courtesy of efforts to boost supply average house price gains will fall from 6.7% a year to near 5%. That has now happened with gains since 2020 averaging exactly that percentage.
Looking ahead it seems reasonable to expect gains around that 5% level but with momentum for the moment capped until the job market heats up heading into the early-November election.
Tony Alexander is an independent economist and produces a free weekly publication with a housing focus called “Tony’s View”, available for signup at www.tonyalexander.nz