Are We There Yet?
The question on every investor’s lips is whether the housing market has bottomed out. It’s time for Sally Lindsay to take a close look.
15 June 2023
Interest rates have reached their peak according to economists. ANZ and Westpac are now factoring in future OCR cuts to their fixed rates.
During the pandemic, house prices rose an unprecedented 40 per cent in two years to a national median peak of $925,000 in November 2021. By April this year they had fallen 16 per cent to $775,000, down a whopping $150,000.
This has hurt buyers and sellers, but CoreLogic chief property economist Kelvin Davidson says the market had to reverse at some time.
The question now is whether house prices have finished falling, even though forecasts are for a peak to trough decline of a little over 20 per cent.
ANZ Bank has already revised its 22 per cent fall projection down to 18 per cent, after April inflation data was better than expected. That means there is only around another 2 per cent to go, says Sharon Zollner, ANZ chief economist. “The market trough is near.”
“The exact bottom will never be known until it has passed,” says Jen Baird, Real Estate Institute of New Zealand’s chief executive.
Davidson says speculation is one thing, but until the bottom shows up in house price indices, it’s just that.
Independent economist Tony Alexander says economists have proved they cannot accurately forecast how the “great unwashed” sweep into and out of the housing market. If he was a buyer, Alexander says he would not be trying to pick the bottom of the house price cycle.
While house prices have a bit more to fall yet, Davidson is picking they will plateau next month and the bottom of the market will show up in August/September indices.
His colleague, CoreLogic head of research Nick Goodall, says the market has definitely been through a significant adjustment in the past 18 months, where vendors have started to come back into the market, and had to adjust their expectations. Asking prices have come down off the back of that.
Davidson says that doesn’t mean if they stop falling they will suddenly start rising. After the global financial crisis (GFC) of 2007/8, house prices fell about 11 per cent and it took seven years before they were back to levels before the calamity. “It is likely house prices, when they stop falling in this cycle, will plateau for quite a few years.”
By then the Reserve Bank’s debt-to-income ratio (DTI) rules will have fully kicked in and they will pull yearly house price growth down to about 3 per cent from the average 6 to 7 per cent growth of recent years, apart from two years of pandemic-induced madness fueled by the Reserve Bank’s decision to lower interest rates to record levels because it was worried about deflation.
ABOVE Following the GFC in 2007/8 house prices took seven years to return to a level seen before this market-impacting event.
Economists are in tune on interest rates being at their peak. Westpac and ANZ dropped their three-year fixed rates to under 6 per cent in April in anticipation of future Reserve Bank OCR cuts.
These are expected to start in November. Kiwibank chief economist Jarrod Kerr says by then we are likely to be in the middle of a mild recession – one organised by the RBNZ in order to tame inflation.
Interest rate cuts should follow adding to an uptick in the property market, that has tightening house listings, no big job losses and loosened LVR restrictions.
Investors can now buy with a 35 per cent deposit instead of 40 per cent and for owner-occupiers banks will be able to use 15 per cent instead of 10 per cent of their new lending for clients who have a deposit of more than 80 per cent.
For now though negatives dominate the sector as pressures from the soaring cost of living, above average mortgage interest rates, and tough credit conditions bite.
But by far the biggest effect on the housing market is employment, says Guy Mordaunt, Property Brokers’ managing director.
The agency has 90 offices in the provinces from Whangarei to Invercargill and Mordaunt says it doesn’t matter if interest rates reach 22 per cent or drop to under 3 per cent, people with jobs still buy houses.
“As long as unemployment is low the housing market will stay reasonably level, although the RBNZ wants unemployment higher, possibly at just over 5 per cent, so it can engineer a recession. Whether we are in one now is neither here nor there.”
People in jobs still want the fundamental Kiwi goal of owning their own home, says Mordaunt. “However, any big shift in unemployment affects sales volumes as do interest rates and confidence to a lesser extent.”
Baird says as there are a lot of significant moving parts in the housing market any mounting job losses will be difficult.
“Those with jobs can keep paying their mortgage or at least part of it. People without jobs are in a bind when it comes to mortgage payments. And too many job losses means mortgage sales and house prices falling further.”
As long as unemployment rates stay low the housing market should remain level.
Access to finance
Davidson says other factors affecting house prices are the availability of finance because of changes to the Credit Contracts and Consumer Finance Act (CCCFA), banks using test serviceability rates at between 8 to 9 per cent, and affordability.
Zollner says banks’ debt-servicing test rates have naturally increased as actual mortgage rates have risen. “Having troughed under 6 per cent, they are now not too far off double digits. This has mechanically reduced the amount that can be borrowed.”
People have accepted the market is weak and to sell they have to lower their prices, says Davidson, but the general mindset about housing is still a bit pessimistic and while there is still new borrowing it is expensive.
Mordaunt says property prices in the provinces have been partly insulated by a mere 10 per cent drop in the median value, compared to the big falls in Wellington, down 20 per cent, and Auckland, down 16 per cent.
ANZ estimates real house prices have already fallen 24 per cent from their peak. “This doesn’t rule out further large falls,” says Zollner. “House prices are still richly valued compared to both rents and incomes, versus where they used to be.”
Mordaunt says people forget house prices are still 17 per cent above pre-pandemic levels.
The falls have had repercussions, with properties now selling on average for $39,500 less than asking price, according to CoreLogic data.
In Auckland the median selling price is $69,000 below the median asking price, and in the capital the median selling price is $55,000 below. In Christchurch the difference was only $25,500. Davidson says it might be those people are taking longer to adjust their expectations on what they have to accept.
Nationally, the discrepancy between asking prices and sale prices equated to about a 5 per cent saving for buyers, and Davidson says asking prices higher than a home’s market value were often a marketing ploy.
Compared to the main cities, provincial properties are still selling, which is a positive in a market awash with doom and gloom, Mordaunt says. “While there are many contradictory economic predictions there will not be a property market crash.
“Although the media’s projections about the ‘tough’ housing market are anecdotally having an effect on people, we feel the market in March hit normality compared to two years ago. There have been changes but they have been of benefit to the market.”
The more normal market, says Mordaunt, is vendors wanting too much, buyers not wanting to pay, and nobody having control.
Access to finance, because of CCCFA changes, is having a knock-on effect on property prices.
Baird says the idea of certainty will boost any pick-up in prices and sales volumes. “Interest rates are the big kicker and affect the sentiment around what will happen in the housing market and prices.
“Sentiment comes from people getting a sense of positive or negative views from others. You can’t go too far in New Zealand without conversation turning to the property market.”
She says migration at record levels is another issue that affects housing. The high number of people pouring into the country puts pressure on housing demand and rentals.
In February net migration soared to a gain of 52,000 from a loss of 20,000 a year ago. This turnaround of 72,000 over a 12-month period is the biggest on record.
Alexander says there will be house price implications, especially once the migration boom enters most people’s consciousness.
“At some stage something will come along, and people will look through the existing level of interest rates and choose to take short-term financing pain in order to secure a property before the horde returns.”
Of more significance, he says, is the combination of falling house building at a time of accelerating population growth.
“The combination of rising demand for housing from accelerating population growth and falling growth in the supply of new houses will produce potentially firm rent rises next year which will start to drag some investors back into building houses in order to gain taxation advantages not permitted to those buying or owning existing dwellings.
“In addition, this interaction of housing supply and demand is likely to see house prices rising again over 2024.”
Baird says it’s a settling of interest rates, migration, employment and credit factors that will play into how the housing market and prices pan out over the next 12–24 months.
“If interest rates plateau and there is more positive inflation figures it will affect the market as sentiment will improve and buyers will come back in numbers.”
Despite what other experts says, Baird doesn’t believe there will be massive change in the market over the next few months. “We are nearly at the top of the rising interest rate cycle and that will bring some certainty to the market, but real estate always slows down in the run-up to an election.”