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Housing market could be near tipping point

Housing market could be near tipping point

For the first time in over three years more people are picking interest rates will fall, rather than rise, but they’re unsure whether it’s a good time to buy a house, writes Sally Lindsay.

By: Sally Lindsay

3 June 2024

ASB says in its latest Housing Confidence Survey that a directionless housing market, high debt servicing costs, plentiful listings and upfront affordability constraints mean it’s far from a straightforward decision on whether to buy.

Interest rates

For the first time since early 2021 more respondents expect interest rates to fall, than rise.

Sentiment on the rates outlook is an important guide to future price direction and can help identify turning points, says ASB senior economist Kim Mundy.

For example, the turn in interest rate expectations in late 2020/2021 was shortly followed by the peak in house price growth at about 30 per cent in mid-2021.

“We will be watching interest rate expectations closely in coming quarters. A key difference this time around is that OCR cuts are still some way away on our forecast of February next year.”

This is one of the reasons ASB is not surprised to see a decent number of respondents expecting house prices to remain unchanged in coming quarters. The broader economic backdrop also matters, and Mundy expects economic growth to remain anaemic and the unemployment rate to trend higher over 2024. Neither factor is particularly supportive for housing demand.

“Nevertheless, as respondents grow more confident in their view that interest rates start falling, it’s likely to boost their enthusiasm (or ability) to transact in the market.”

Ultimately, ASB doesn’t expect to see a more pronounced lift in house prices until the RBNZ signals it will soon trim the OCR.

To buy or not to buy

There was no movement in the three months to April, with a net two per cent of respondents thinking it was a good time to buy.

And once again, more than half of the respondents were firmly on the fence, with 55 per cent thinking it was neither a good nor bad time to buy, up slightly from 52 per cent last quarter.

There is a split evident in responses between the North and South Island.

Auckland respondents were the most optimistic, with a net five per cent thinking it’s a good time to buy. On the flip side, all respondents in the South Island still view it as a bad time to buy on balance.

The housing market is tipping in favour of buyers, at least from a choice perspective, with inventory levels sitting at about 10-year highs.

Mundy says this suggests that for those who want to buy a first home or an investment property it might be feeling like a good time to buy. Also, prices are still well below their late 2022 peak.

However, the picture isn’t as clear for those who may need to sell a house to buy.

With current inventory levels so high and time on the market rising, they may not be looking so favourably at the prospect of buying a new house while selling their existing home at a time of uncertain timeframes or selling price.

House prices

House price expectations faltered in the three months to April. A net 44 per cent of respondents expect higher house prices, down from a net 51 per cent last quarter.

“Nevertheless, higher prices ahead remained the most common answer,” Mundy says.

Looking across the regions, South Islanders (excluding Canterbury) were the most optimistic on house price gains, with a net 48 per cent expecting lifts.

At the other end, Cantabrians and those in the North Island (excluding Auckland) were slightly less convinced, with a net 43 per cent expecting higher house prices ahead. A closer look at the responses highlighted that almost 90 per cent of those surveyed expect house prices to be either flat or higher.

On balance, the flat-to-higher outlook is consistent with recent trends continuing over coming quarters.

This corroborates well with ASB’s house price forecasts. Mundy says there has been one expected, and one less expected, market moderator weighing on house price growth recently.

The known is high mortgage rates and associated affordability constraints. The surprise is elevated new listings pushing the supply of houses on the market to about 10-year highs.

To the extent that house price expectations are tied to the outlook on interest rates, Mundy expects this flat-to-higher bias will be retained until a material fall in interest rates looks more certain.