Summary.   With any luck we will soon be able to say that the worst for the residential real estate market is now behind us. In both January and February the number of properties sold around New Zealand was the lowest on records which run from 1991. But March was only the sixth worst March month on record – though turnover was still 15% down from a year earlier and 21% down from March 2020.

Closer to the bottom

Tony Alexander

Monday 15 May ‘23

Price movements are also looking less bad. After adjusting for seasonal factors it looks like prices on average only fell 0.2% in March after falling 1.1% in February and declining 1.1% on average for every month since December 2021.

Why are things showing signs of bottoming out? Almost certainly because of the return of first home buyers to the market about three months ago. They are taking advantage of the high number of properties listed for sale, banks easing their lending criteria slightly to try and win business, wages rising firmly while house prices have declined on average 17% from their peaks, and rising rents.

There is no sign that investors are becoming more active on average – though there are reports of some with low debt taking advantage of the financial difficulties many developers are having to purchase some good properties at reasonable prices.

Owner occupiers are also fairly quiet and they probably won’t enter the market to buy and sell until there is a good feeling that interest rates have peaked. We cannot know when people will decide that the worst has been and gone for mortgage rates and it will probably take some soothing comments from the Reserve Bank regarding inflation nicely tracking lower and scope existing for the removal of some monetary restraint not too far out.

But we are not at that point yet. The actual inflation rate of 6.7% is much too high and smaller measures of price changes may be tracking lower, but they also are still much too high.

It is not just a matter however of trying to guess when the interest rate outlook changes and when people recognise it and choose to act on it. There is also the issue of net migration flows. Media have been filled with stories of people flooding to Australia for better incomes, encouraged now by the improved route to citizenship.

But while we are experiencing a net loss across the Tasman, there are so many people coming in that the net annual migration flow has soared to a gain of 52,000. This is a 1% boost to the population which may go higher. At some point the average person will realise what is happening. Then they will figure out the implications for house prices and rents. Then they will act on those calculations.

We cannot know when these changes will occur – and then it gets worse from a forecasting point of view.

Just as real estate turnover may be bottoming out, house construction is doing the opposite and set to decline for the next 2-3 years. At some stage buyers will realise what a slowing in the pace of growth of newbuild supply will mean for prices when population growth has sharply accelerated and borrowing costs face brighter prospects.

The scene is being set for a turning of the housing market with price movements that may well surprise people come 2024. But for now, with consumer pessimism high, talk of recession, access to finance still difficult (despite upcoming LVR changes on June 1), and fears still strong of further price falls, the 2023 Winter is still likely to be challenging for agents. But for buyers who can step back from the fray and dispassionately assess the changing situation, the environment remains good for securing a purchase with little competition from other potential buyers.  

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