Economist’s house price gloom

First-home buyers should ‘‘throw in a low offer’’ if they find a house they want to buy, and line up two or three to compete against each other, one economist says.

Independent economist Tony Alexander says house prices are not sustainable at their current levels and will probably fall until the middle of next year.

But he says anyone hoping for a fall greater than 20% – which would take prices back to where they were at the end of 2020 – would probably be disappointed.

House prices lifted 13% between March and December 2020.

Some commentators suggest that a reasonable measure for housing affordable is for prices to settle at three times household income. But that would require a fall in average price of 66%.

Alexander said prices would not fall so far that they were anywhere near that ratio.

‘‘Forces are already in play to strongly limit the extent to which prices fall this cycle and the duration of the period over which these declines will occur.’’

He said one of the factors that was likely to keep house prices well above that measure were interest rates.

‘‘Around the world interest rates were structurally falling for over three and a half decades from the late-1980s. As mortgage rates went down more people qualified for debt funding of a house purchase. Lower mortgage rates have been factored into higher house prices, share prices, commercial property prices and so on. Lower deposit rates and returns on other assets meant investors were incentivised to purchase houses for their yield.’’

There had been a push to encourage people to save for retirement, and many people had chosen to do that with property investment, he said. Government and local council fees were another factor, he said – the cost of building was driven up through consent fees, developer levies and tighter rules around materials.

Average household sizes were dropping as the population aged, which meant more homes were needed for the same number of people and there had been a lack of productivity growth in the construction sector.

‘‘The current period of house price declines is likely to end sooner than many people are thinking.’’

Alexander said reports such as that from Bloomberg last week that rated the country’s housing market as the most vulnerable in the OECD had been issued relatively regularly over the past two decades.

He said house prices would ‘‘one day’’ grow again at the rate seen in 2021 but it might not be for 10 or 20 years.

Prices would probably bottom out by mid next year, and then remain relatively flat. ‘‘My message to buyers is that I would still be engaged in the market and actively looking because the range is improving and vendors are more willing to negotiate.’’