Summary.   During 2019 average house prices around New Zealand rose by 7% assisted by interest rates being cut to record lows in the middle of the year as the Reserve Bank tried to lift inflation which had averaged only 1.2% a year from 2012. Once people started buying anything in sight at the end of the first lockdown in May 2020, house prices surged by 18% in 2020.

Maybe six more months of real estate weakness

Tony Alexander

Monday 15 August ‘22

My expectation early in 2021 was that with LVRs returning from February and set to be strengthened from May, investor tax rule changes announced late in March, new density rules announced late in 2020, rising house construction, and hopefully an end to the covid environment, that house prices would rise maybe 5% and a bit more.

Instead, they soared by 23% in 2021. This extra 18% jump in prices reflected a wide range of things including continuing strong FOMO, too much money being pumped into the economy by the Reserve Bank, greater than expected strength in the labour market, a strong jump in net migration inflows, and rising construction costs.

The extra jump in prices was assisted by the complete absence of any solid evidence of a wave of investor selling in response to the tax changes and legislation strengthening tenant rights. But from just before the middle of the year fixed mortgage interest rates began rising and by June this year were 3.0% - 3.2% higher than back then.

We also saw the quarterly pace of increase in the cost of living start soaring (inflation), and a credit crunch develop.

This bit tightly from November when banks had to restrict new low deposit lending to less than 10% of all home lending. Then the flow of credit to households deteriorated sharply from the start of December when changes to the Credit Contracts and Consumer Finance Act became effective.

These changes made banks fearful of lending to anyone other than the most asset and cash flow rich non-spendthrift clients for fear of being deemed to have undertaken “irresponsible lending”. The drying up of credit flows put an abrupt end to the headlong rush for property. FOMO collapsed to be replaced eventually by FOOP – fear of over-paying.

Sales of property nationwide in June were down 38% from a year earlier, the number of days taken to sell a dwelling was up 13 days, and the stock of properties listed for sale was 86% up from the end of June 2021.

Prices, as measured by the REINZ’s House Price Index were 0.7% ahead of June 2021 but down 9.5% from the peak in November 2021. With the various surveys I run still showing very weak levels of demand (but still no rush of sellers) it is reasonable to expect that house prices will ease further over the remainder of this year.

A common pick is that the peak to trough decline will amount to around 15%. That seems reasonable and if it happens then we will be able to say that house prices haven’t really fallen because of loss of faith in the asset or the economy, but they have simply retreated from unsustainable highs.

A correction in prices is underway and even the Reserve Bank recently noted that once prices have fallen 15% from their peak they will no longer be considered “unsustainable”. What will happen once the correction is over?

Very soon I expect worries about interest rates to be easing as forecasts for inflation start getting cut in response to weakening economic activity here and overseas. In fact, falls in fixed mortgage rates are likely. By themselves these cuts before the end of the year may not bring the growing queue of buyers biding their time back into the market. But if we add in a good chance that the LVR rules are changed within six months then come January 2023 things are likely to look quite different in the residential real estate sector.

From early next year I expect to see sales recovering and prices eventually moving up to record gains perhaps near 5% for calendar 2023. But we are not there yet. The deep worries about the cost of living shock, net migration outflows, failing developers, and mortgage rates resetting higher still have some considerable restraining life left in them this calendar year.

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