Price Falls Predicted From 2022
Sally Lindsay speaks to those in the know about what’s influencing the housing market this month and what the future may bring.
1 September 2021
Analysts from investment advisory group Jarden expect house prices to fall by 6% next year and 3% in 2023. Grant Swanepoel and Luan Nguyen gave this prediction ahead of Fletcher Building’s full year’s results last month.
Fletcher Building’s main earnings are from building new houses across the country and the industry is adding 32,000 new homes a year, which is close to capacity. Total industry construction is 4,000 higher when second homes and knockdown rebuilds are added.
The Jarden analysts say house price changes are the key factor influencing house construction, the others being GDP growth, supply-demand balance and Government incentives.
Swanepoel and Nguyen say house price drops will come because new homeowner resources are stretched. This is because mortgage payments – as a percentage of household expenditure – have recently topped 28%, pushing past the 26% 12-year average.
In addition there is limited scope for material rent increases as rent – as a percentage of household expenditure – has hit a new high. Renters have also been somewhat stuck by a lack of supply which is starting to ease. And rising mortgage interest rates are pushing both new homeowner and investor models into duress.
“There is a view, house prices don’t go down – mainly backed up by evidence from the mid-2000s when house prices defied interest rate increases and continued to rise.
“However, house prices can fall, as happened in the 1970s when real prices fell almost 40% over the decade and for a few shorter periods through to 2000.
“In the mid-2000s, despite sharp hikes in mortgage rates, house prices did not fall because there was a period of housing re-rating as an asset class. Another re-rating is unlikely to be available in this current cycle,” say Swanepoel and Nguyen.
Jarden’s blended house price analysis shows house prices sitting at $746,192 by the end of December next year, down 6% on the $792,574 forecast for the end of this year. "This price point is about 10% overbought from a new homeowner’s perspective and 16% from an investor standpoint,” say the analysts.
“New housing supply shortages will continue to ease from 2023 but remain elevated for many years.”
Swanepoel and Nguyen anticipate a sharp pullback in volumes next year and 2023, although moderated by the existing momentum and Government interventions to improve the market undersupply. Their analysis shows house builds will continue at the top quartile for the next two years before drifting toward midcycle by the mid-2020s and then into third quartile by the early 2030s.
A 5.3% drop in the number of sales from June 2021, may signal the start of buyers being impacted by the return of LVRs and interest rate rises, new data from REINZ shows.
“We need a few more months of data before we can see the impact of these changes and whether or not they are a long-term trend,” says Jen Baird, REINZ chief executive.
The availability of property for sale continues to put a constraint on activity in the market, with a record low level of inventory reported in July and continued strong buyer demand.
The total number of properties available for sale across the country dropped by 34.8% in July to 12,684 down from 19,441 in July 2020 – 6,757 fewer properties compared to 12 months ago. This is the lowest level of inventory ever seen, surpassing the previous record low set in December 2020 with 12,932.
For the fourth month in a row, only one region had an annual uplift in inventory levels – Gisborne with a 20.0% increase from the same time last year – 50 to 60 properties.
“There are signs of more listing activity including from people who will take possession of a newly built home – a result of the record levels of consents granted over the last year. Played out, this will hopefully mean stock levels will increase soon, delivering more choice into the market,” says Baird.
For the third month in a row house price growth has slowed, the latest QV House Price Index shows.
Nationally, the average house price now sits at $952,078, an increase of 26.4% year-on-year, up slightly from 25.6% last month.
The average value increased 4.3% nationally over three months to the end of July, down from the 6.6% quarterly growth in June.
In the Auckland region, the average house price is $1,352,677, up 3.5% over the three-month period, with annual growth of 23.7%, up a fraction from June’s year-on-year growth of 23.4%.
QV general manager David Nagel says three monthly value growth has more than halved since April when it was rocketing along at 8.9%
“The market is clearly cooling now as a result of Government and Reserve Bank policy initiatives aimed at dampening the enthusiasm of investors. With looming interest rate rises, we will likely see a continuation of this trend.”
All of the 16 major urban centres QV monitors have shown a drop in threemonthly growth compared to last month. The strongest value gains over the past three months have come from Palmerston North at 6.7% growth in value, down from 8.5% last month, closely followed by Christchurch at 6.3% growth, down from 8.3% three-monthly growth last month.
None of the major urban areas QV monitors have seen a drop in average house prices, but Marlborough has all but flattened out at 0.2% growth, compared to 4.4% three-monthly growth last month.
Central New Zealand continues to show the strongest value growth, with the three fastest growing regions all in the lower North Island.
House values in the Manawatū- Whanganui region have grown 38.1% in the past year, while the greater Wellington and Hawke’s Bay regions have had annual growth of 34.3% and 31.8% respectively.
The three lowest annual growth rates are all in the South Island; the Southland region experiencing a still-significant 19.4% increase, with Otago showing 21.6% and Tasman at 22.9% annual growth.
“The fundamentals of the property market are still strong, so we’re unlikely to see a wholesale drop in house prices anytime soon,” says Nagel.
“However, we may begin to see quarterly value growth taper off in some localities altogether, and even some small reductions as we come to the end of the current growth cycle. But while interest rates are still low and listings remain in short supply, it’s more likely we’ll see a continued slowing in the rate of price increases over the coming months as the property market continues to absorb the recent changes,” Nagel added.
Investors had best hope come the middle of 2022 that house prices have not gone up by another 10%.
Why? Independent economist Tony Alexander says if they do the Government will conclude its efforts to make housing more affordable have failed and it will look for some other way to dissuade investors from buying – and encourage them to sell.
Some of the blame has to be placed at the Reserve Bank’s door as it says its house price forecasts have been consistently wrong over the past decade, because immigration has been higher than expected and interest rates lower than expected.
“Since 2010, on average our forecasts for annual house price inflation one year in the future have been out by 5.2 percentage points (‘mean absolute deviation’),” the RBNZ says in a report prepared for Parliament’s Finance and Expenditure Committee. Excluding the Covid-19 period, the same metric is 3.9 percentage points.
Alexander says the Reserve Bank’s first port of call will probably be to remove the ability to deduct other expenses from rental income for tax purposes – perhaps all expenses.
“This would be fairly radical – but then so too is removing the ability to deduct interest as a business expense.”
He says there are, however, other ways in which investors might be negatively affected by new developments.
• DTIs The Reserve Bank will be able to limit the debt a bank can extend to a borrower as a ratio of their income, with that debt being measured maybe as just mortgage debt, maybe as all debt. In Ireland this ratio is 3.25 times income and in Britain it is 4.25 times income.
•Debt servicing restrictions The Reserve Bank will be able to force banks to cap the proportion of a borrower’s income which can be allocated to servicing debt. Banks usually use 30% or thereabouts. The Reserve Bank might make them use something lower like 25%.
• Interest rate floors The Reserve Bank will be able to specify the minimum interest rates banks must use when calculating debt servicing ability. For instance, a bank might lend at 4%, but the Reserve Bank may require they work out debt servicing costs using an 8% interest rate.
New home building is likely to remain strong over the new few years, with consents in June reaching a new record.
Consents rose by 3.8% in June, following on from strong increases in recent months, particularly for apartments and townhouses.
Stats New Zealand figures show 44,299 new dwellings were consented over the past year – a new record and up 18% from the June 2020 year.
The seasonally-adjusted number of new houses consented rose 3.8%, after falling 2.4% in May.
In June, 4,310 new houses were consented, comprising 2,373 stand-alone houses; 1,303 townhouses, flats and units; 413 apartments; and 221 retirement village units.
The total value of new dwellings consented in the year to June was $16.58 billion, up 20.4% compared to the previous 12 months. Further, another $2.18 billion was consented for structural alterations to existing houses.
Much of the building strength is centred in Auckland, with more than 19,000 new houses consented over the past year.
Westpac economist Satish Ranchhod says the pace of building will go a long way to addressing the shortage of homes that has built up over the past year, especially with the borders now closed and population growth set to remain low for some time.
There are also high levels of consents being issued in areas such as the Waikato, Hawke’s Bay, Wellington and Manawatū/Whanganui; and ongoing strength in Canterbury.