There is one way to gain a sense of what will happen to Australian property values in 2023, notwithstanding the impossibility of predicting the future: look over the ditch.
Since the Reserve Bank of New Zealand (RBNZ) began the current interest rate increase cycle in October 2021, New Zealand has served as a leading indicator for property markets and economies across the developed world.
While some central banks, such as the RBA, were slow to join the campaign to combat inflation, other central banks worldwide followed the RBNZ in rapidly increasing interest rates.
Since they were high in November last year, house prices in New Zealand have declined by 13.7% nationwide, with Auckland and Wellington leading the decline with 18.3% and 21.6%, respectively.
Despite these significant declines, the New Zealand housing market shows little indication that prices will soon cease falling.
According to the Real Estate Institute of New Zealand statistics, prices decreased by 1.4% nationwide in November, with New Zealand’s largest market, Auckland, seeing a significant drop of 1.9%.
As prices continue to decline fast on the other side of the Tasman, this poses an important issue for the Australian housing market: Is New Zealand delivering a preview of what Australia may face in 2023?
A Look At How People Live In Different Places
While there are undoubtedly significant variations between the Australian and New Zealand housing markets, it is essential to note that the price declines seen in New Zealand are not exceptional.
Nationally, housing costs have decreased by 15% in Sweden. In several of the most significant home areas in the United States, house values are plummeting faster than during the global financial crisis recession, with Seattle and San Francisco plunging 9.5% and 11.6% in only four months, respectively.
In Canada, which shares with Australia property investor advantages such as a capital gains tax discount and negative gearing, house prices have declined 10 percent from their February high.
Different circumstances, objectives, and government actions may affect the trajectory of housing markets in each country.
Significant Differences
There are noteworthy distinctions when comparing Australia and New Zealand. In Australia, real estate investors may offset rental property losses with income from other sources, such as work.
In New Zealand, the government of Prime Minister Jacinda Ardern terminated negative gearing for new buyers in September 2021 and for current property investors by the end of March 2025.
Despite recent efforts by Andrew Wilkie, an independent Tasmanian politician, to remove negative gearing, the Albanese administration has shown little inclination to alter the policy.
Australia also offers a capital gains tax reduction to encourage real estate investors to enter the market. All assets held for more than a year are eligible for a 50 percent reduction in the tax owed on capital gains.
In New Zealand, there is no such capital gains tax reduction; property investors must retain a property for 10 years to avoid paying tax on possible sale earnings.
There is also the question of immigration, where New Zealand and Australia take diametrically opposed approaches. In New Zealand, migration statistics for the year ending in September showed a net departure of 8,400 people. Australia’s net migration for the year ending in June was 171,000 people.
Polar Opposing Monetary Policy Approaches
The central bank of New Zealand reportedly predicted a recession in 2023. Yet, despite anticipating a recession, the RBNZ lifted interest rates by 0.75 percentage points to 4.25 percentage points almost simultaneously.
The RBNZ foresees an impending economic slump but forecasts its cash rate to peak at about 5.5%, an increase of 1.25 percentage points from its current level.
Last week, New Zealand legislators challenged RBNZ Governor Adrian Orr on whether the central bank was purposely manufacturing a recession.
“That is accurate,” Orr said. “We are attempting to reduce aggregate economic expenditure on purpose. The faster inflationary expectations decline, the less work we must do and the less likely we will see an extended period of low or negative growth.”
The RBA is pursuing a radically different strategy in Australia, even though some of the most important underlying fundamentals have comparable numbers.
The current quarterly CPI puts inflation at 7.3% for the year ending in September, whereas in New Zealand, it is 7.2%. In New Zealand, the Labour Cost Index is growing at a rate of 3.4% per year, while Australia’s Wage Price Index (WPI) registered a 3.1% rise over the last year.
Despite these parallels, prominent banks predict that the RBA cash rate will peak between 3.35 and 3.85 percent, much lower than the current RBNZ cash rate of 4.25 percent and in an altogether different ballpark from the predicted high of 5.5% in New Zealand.
Australia’s Housing Prices In 2023
Amid a sea of red ink flowing from property markets in the majority of the developed world, the crucial issue is whether Australia can again dodge the worst of the situation, as it did during the Global Financial Crisis.
Australia has much in common with Canada, where costs are falling in some regions. Both countries feature exceptionally high immigration rates, negative gearing, and a capital gains tax discount.
In contrast to the majority of the industrialized world, Australia has an economy highly dependent on bulk commodities and low levels of federal debt. If inflation falls enough, the federal government may be able to throw money at the housing market again in the name of affordability, even though multiple analyses have shown that this sort of intervention has the opposite impact.
In the end, the destiny of the Australian property market may be determined outside our borders by the strength or weakness of a global economy that, according to a growing number of analysts, will enter a recession in 2023.
