Sir John Key says two big things will have to happen for the New Zealand housing market to really crash - interest rates need to skyrocket and the job market completely fall apart.

The former prime minister and ANZ NZ chairman was speaking in a Facebook video for his son Max Key’s property development company.

New Zealand is currently facing high inflation, skyrocketing cost of living and falling house prices.

The annual inflation rate sits at 7.2 per cent in the September quarter, which is well above the Reserve Bank of New Zealand’s 1 to 3 per cent target. As a result, the RBNZ has been steadily increasing the Official Cash Rate which is currently at 4.25 per cent.

According to the latest figures from the Real Estate Institute of NZ (REINZ), inflation and rising mortgage costs have led to house prices dropping 7.5 per cent annually.

Median house prices across the country fell from $892,000 in October 2021 to $825,000 in the same month this year, and the decline has caused concern for homeowners - some of whom are facing the possibility of negative equity.

But Key believes the housing market was unlikely to crash despite what was happening in the property market. He said for people to roll over, the need for further aggressive increases could be mitigated.

 “One thing that’s really interesting at ANZ, of our customers who borrowed for a home loan up until about a few weeks ago, 57 per cent of them still had a mortgage that either had a two in front of it or three in front of it,” Sir John said.

“So they’re going to have to roll off very soon in the next six months and when they roll off they’re going to roll off onto something with a six in front of it, maybe even higher. So you can’t tell me that isn’t going to have a dramatic impact on people’s capacity to go out and buy everything from pizzas to a new frock.”

He said even if New Zealand goes into recession, which could happen in 2023, the property market was unlikely to crash.

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“When we look at recessions we look at property at ANZ and there are only two things we worry about, do people have a job and how much are they paying for the money?

 “At the moment unemployment’s down at 3 per cent. Well, when I came in as Prime Minister in 2008, the first thing Treasury told me was they expected unemployment to peak at over 10 per cent, that’s over three times, four times what you see today. Now I don’t think you will see anything like that in New Zealand going forward.

“I think maybe (unemployment) rises a bit, maybe it goes to 3.5 or 3.7, maybe a few people get laid off, but I don’t think it’s anything like that.”

Key said for it to “really, really, really get the property market to really crack, you’d have to have interest rates going through the roof from here and you’d have to have labour markets going through the floor”.

“We do all of that stress testing of our balance sheet at ANZ and even then we see property prices down obviously from where they are and pretty significantly down but that’s Armageddon,” Key added.