Maybe six more months of real estate weakness

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.

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.