ANZ economists have declared that New Zealand's housing bubble has largely deflated, though house prices may still have a little further to fall. They analyzed how current prices compare to long-term fundamentals, including the house-price-to-income ratio, which peaked at nearly nine in 2021 before correcting back to six as prices declined and incomes rose with inflation.
Matthew Galt, a senior economist at ANZ, noted that while a ratio of three to four was typical before the 2000s, structural changes such as lower interest rates, population growth, and increased credit availability make a return to those levels unlikely. He also highlighted that the Reserve Bank's sustainable house price indicator still shows some concern, with home ownership costs elevated compared to renting.
Galt pointed out that the house-price-to-build cost ratio is at its lowest in years, suggesting limited further downside for house prices. He emphasized that while the correction has been painful, it has restored prices to a more sensible level without financial stability issues. However, he cautioned that if long-term interest rates trend higher than expected, house prices could come under further downward pressure.
The economists concluded that after prices reach fundamentals, they are likely to trend up over the long term with household incomes and construction costs, though large cycles will continue to occur around this trend.