Why are some regions more vulnerable to a downturn?

"It's important to recognise that we're in a period of the market slowing down"

Why are some regions more vulnerable to a downturn?

Some areas of the country may be more vulnerable to a slowing property market than others, and we should expect to see some volatility across the regions over the coming months - something property data firm CoreLogic said advisers should be aware of when helping clients on their property journey.

CoreLogic recently released its Property Vulnerability Index for 2021, and Nick Goodall said that there has already been some volatility in quarterly growth across the regions. He pinpointed this as a sign that the market is slowing, and noted that now is a good time to assess which areas might be more vulnerable to price falls over the next year, as the government deliberately takes steps to cool growth.

CoreLogic looked at factors including supply, local economy and employment, credit scores and demand for property in its research, and Goodall said that we can already see some “patchy performance” in some areas - a trend that is likely to increase as the market continues to decelerate.

“It’s important to recognise that we’re in a period of the market slowing down,” Goodall said.

Read more: Regional areas feeling pressure from record low sale listings

“We’re still seeing strong rates of growth, but the quarterly rates have been slowing down over the last while. When markets slow, the key thing we start to see is divergence across the regions, so we’re starting to see some parts of the country have a slower rate of growth while others are actually seeing an acceleration.”

“That’s often quite patchy month to month, and the figures can jump around a bit,” he explained.

“You can see that with Hamilton, where we saw its quarterly rate of growth dip into negatives at the end of August, but then jump back up again the following month. I think this volatility is really a sign of the market not being as strong, and we’re not seeing all properties selling strongly - there’s some patchy performance, with strong competition for some properties, and less for others.

“That’s really led us to take a closer look at where things are, and whether some areas are going to see more vulnerability in the future.”

Given the increase in the OCR in September, the report also looked at the impact of rising mortgage rates on the property market. Goodall warned that while a rise from a 2% to a 4% rate may not seem high, this will still translate into a noticeably higher monthly cost for mortgage holders, and this will ultimately slow house price growth even further.

Looking at the results, the smaller New Zealand centres seemed to have the highest level of vulnerability in the North Island, while the northern part of the South Island seemed fairly strong, with vulnerability levels increasing as you travel further south.

“The influence of interest rates is a key factor that we looked at,” Goodall said.

Read more: Real story is in the regions

“We’d already seen mortgage rates start to show life even before the September hike in the OCR, so we were already in an environment of rates lifting. We know that this will slow the rate of growth, and it’s already done so.”

“Looking at Reserve Bank house price forecasts, we can see that the projected growth drops down to zero by the end of next year, and then potentially into negatives the following year,” he explained “But that’s a nationwide forecast, so one of the things we wanted to do was to really tease out the regional differences.”

“The key places that stand out in the North Island are the smaller centres, and they’re really showing up as the most vulnerable,” Goodall said.

“Looking at the South Island, the only one that jumps out from a high vulnerability perspective is the MacKenzie District in the central part of the South Island - a heavy area for holiday homes. The more robust areas are in the northern part of the South Island around the Nelson-Tasman area, and also the wider Canterbury region.”

When it comes to using the research, Goodall encouraged advisers to make use of the data - particularly those who are most active outside of New Zealand’s major cities.

“We hope this research will help inform all market participants, whether you’re an agent, a valuer, a banker or an adviser,” he said.

“Those participants may want to use more caution in some areas than others, and if you’re acting in a local area, it always pays to understand that better.”