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WELLINGTON, Nov 27 (Reuters) – A dramatic boom-bust cycle in New Zealand’s housing market has left many Kiwis and investors scarred and an economy struggling to fire, turning what was once a trusted strategy for creating wealth into a period of unease and potentially smaller future returns.

New Zealand has traditionally relied on housing as an engine of growth, but the current shakeout in the property sector has been particularly telling on the economy, dragging it into contraction in three of the past five quarters.

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“Two and a half years of flat to falling house prices has basically just been a heavy wet blanket on top of the economy,” said ANZ chief economist Sharon Zollner.

The current gloom in the sector is rooted in more than a decade-long affordability crisis that came to a head during the pandemic, as house values soared around 40% to sky-high levels in an 18-month period through to November 2021, fuelled by sharply lower interest rates and government stimulus.

When the bubble burst, a combination of aggressive interest rate hikes by the Reserve Bank of New Zealand and an increase in housing supply saw prices crumble by nearly 20%, and as much as 30% in some cities.

The collapse in house prices, which are still 15% below their peak in 2021, has brought much-needed relief for first-home buyers but has also raised questions about future returns as low net migration, rising unemployment and the government’s tight fiscal stance depress demand.

Satish Ranchhod, senior economist at Westpac, said the market dynamics have changed as the post-pandemic building boom increased the supply of homes, while slower population growth has kept inventory high.

“It does mean quite a different supply and demand balance,” said Ranchhod, tipping house prices to rise 5% in each of 2026 and 2027, a modest uptick in the context of recent sharp falls and compared with historic rates of growth.

NEW NORMAL OF MODEST RETURNS?

For a generation of New Zealanders, who have enjoyed average annual returns of roughly 7% in housing over the last three decades, the decline in prices for three consecutive years since 2021 is unprecedented.

In fact, property values dropped in only two of the years since 1990, making investment in housing a sure bet for Kiwis and a major driver of economic growth.

That certainty of steady capital gains has been eroded by several factors, not least by unemployment at a nine-year high and slow net migration growth even as the central bank has sharply reduced rates to a 3-1/2-year low since August last year.

Analysts note that with over half of New Zealand’s household wealth tied up in property, the downturn has had a chilling effect on consumption and the economy.

Kelvin Davidson, chief economist at Cotality, said that activity had started to pick up but this was off a low level, adding that a weak economy, an overhang of listings and concerns about employment continue to weigh.

“You’d probably still call it a buyer’s market,” said Davidson, predicting limited house price growth next year despite an improved outlook.

That view was underscored by the Reserve Bank of New Zealand’s latest forecasts released this week, with capital gains of 3.8% and 3.7% projected for next year and 2027, respectively.

While first home buyers have returned to the market, the number of houses available is higher than the historical average. Investors have also scaled back activity – buyers of multiple homes are now 35.9% of the market, down from a recent high of 39.5% in 2021, according to data from Cotality.

The number of houses for sale in October was 33,588, up from 19,260 when the market peaked in November 2021, according to the Real Estate Institute of New Zealand, an organization representing the sector.

Tim Horsbrugh, a property investor with 13 rental tenancies, said a few years ago a group of investors he knew were flipping houses – the practice of buying a property at a low price and selling it for a profit after making improvements.

But not anymore, as “the people that were doing it have lost money.”

“Going for capital gains now is tough. Real tough,” he said. “And I don’t think people are going to be back into that market for a long, long time.”

STRUCTURAL SHIFT UNDER WAY?

The government campaigned on reducing house prices to improve affordability, yet the current property market downturn is putting a dampener on the economy.

Jarrod Kerr, chief economist at Kiwibank, said housing is by far the largest asset owned by New Zealanders, with two-thirds owning their own homes, and that means house price increases play a big part in sentiment.

“If house prices are up, you know, 2% to 5% next year, then I’ll be saying that the economy will be climbing higher, because consumption will simply come back,” Kerr said.

New Zealanders though may take some time to come to terms with a shift in the housing market.

“It’s too early to call a structural change in the housing market but there are some indications that might have happened,” said Paul Conway, chief economist at the RBNZ.

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