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Housing Market: Where Are We Now

John Bolton shares his take on where things are at, and where they’re going for interest rates and, more broadly, the housing market.

By: John Bolton

1 August 2022

With so many hard-hitting changes playing out across New Zealand’s housing market of late, (and trying to make sense of them) it’s been a while since I’ve done a general market update.

Here’s my take on where things are at, and where they’re going, for interest rates and the housing market more broadly.

For a while now I’ve been of the view that interest rates will peak somewhere between 5.50 per cent and 6 per cent. And as time goes on, I’m only becoming more convinced.

The rhetoric coming out of the Reserve Bank this year has centred on swift and aggressive action to bring inflation under control – rhetoric they’ve followed through in recent announcements, with the OCR (official cash rate) now tipped to get as high as 4 per cent.

So, despite the OCR having only just reached a “neutral” 2 per cent (neither stimulating nor stifling the economy), mortgage rates are already up around what we’d expect to see at that 4 per cent peak.

In other words, through tough talk the Reserve Bank has effectively orchestrated a full tightening in less than 12 months, and we’re all feeling that now. Its hit Kiwis in the pocket, slammed the brakes on the economy, and sent business and consumer confidence plummeting.

‘The good news for property investors will be improving liquidity’

Amongst all that, it seems increasingly likely that we – and the rest of the world – are heading into recession, and if that’s the case we won’t need many more OCR and interest rate increases to rein in the economy. It’ll slow of its own accord.

As a result, long-term wholesale interest rates have fallen by three quarters of a per cent in the past few weeks as financial markets price in a much weaker economy and therefore lower forward-looking interest rates. Those benefits are trickling through to consumers, with several major lenders announcing cuts to their two-year home loan rates.

Market Will Find Way Back

No-one wants to catch a falling knife.

That sentiment of fear is what’s dominated as people grapple with falling house prices and rising interest rates. But as interest rates settle, I expect we’ll start to see some level of market confidence return, or at the very least, less panic.

It won’t be immediate – there’s probably another 3-4 months of doom and gloom ahead – but towards the back end of the year we should start to see the odd green shoot, particularly as immigration picks up again (whenever that may be).

That’s not to say house prices will go up, but the level of people coming back to the market, and the number of transactions occurring, should gradually claw a way back to normal as people get on with their lives.

The good news for property investors will be improving liquidity. Come early 2023, if you want to sell chances are you’ll be able to, albeit meeting the market will mean lower prices.

House Prices

Right now, I’d say that people should be banking on a fall in absolute prices of at least 10-15 per cent from last year’s highs. There will be parts of the market (like development property) that experience greater falls.

As wage increases start to take effect, and catch up with inflation, that’s going to improve buyer affordability – which (long term) supports some level of absolute house price growth.

In the short term it will help arrest the slide.

I suspect entry-level house prices (for example) could get back to where they were last year within the next three to four years due to inflation. In real terms they’ll be down but so will the loan, so that doesn’t matter much to borrowers.

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