Home truths: What to expect in ’23
Experts predict what could be in store for rollercoaster property market next year
House prices have been on a rollercoaster ride in the three years since Covid hit, stumping property pundits. Economists first tipped prices would face big falls when the pandemic hit in 2020. Instead, they leapt by more than 30 per cent.
Then, pundits forecast prices to rise slowly or possibly drop a little this year. Instead, they plunged by the biggest amount in more than 10 years.
And now that prices are continuing to fall while interest rates are climbing, what will the housing market do in 2023 and what factors should we keep an eye on?
A number of pundits make some tentative predictions.
2022: A quick recap
House prices hit a record high at the end of 2021 before continually falling this year.
The Real Estate’s Institute’s House Price Index found the market fell 13.7 per cent between November 2021 and November this year — the biggest year-on-year fall since the Global Financial Crisis.
Analysts OneRoof and Valocity recorded similar results.
They said Wellington fell the most, with average property values plunging $201,818 or 17.7 per cent to $940,000 from record highs recorded earlier this year.
Auckland was the country’s second-worst affected region.
Its prices peaked in November 2021 but have since fallen $180,000 or 12 per cent to $1.4m.
A swathe of headwinds was to blame for the price falls, according to pundits. Key among them was inflation, which reached its highest level in 32 years, Infometrics economist Brad Olsen said.
Inflation rose on the back of a number of factors, including the Government printing cash as stimulus during the pandemic, supply chain woes and war in Europe.
To combat inflation, the Reserve Bank repeatedly raised the Official Cash Rate from record lows in 2020, with more rises expected next year.
That led banks to raise mortgage rates, putting pressure on homeowners who saw their interest repayments leap by thousands a year.
Banks also tightened lending rules in response to new laws, making it harder for home buyers to get loans and helped reduce buyer demand.
The number of homes on sale also jumped dramatically during 2022, further weakening buyer demand.
Kelvin Davidson, of CoreLogic, said the collection of factors meant while pundits tipped prices would fall, most failed to predict by how much.
“We, and many others, underestimated how deep the downturn in sales volumes would become and also how far house prices would fall.”
What about 2023?
Most pundits tipped prices to continue falling but expected the speed of the falls to slow.
Davidson said his team at
CoreLogic had recorded about a 10 per cent drop in average Kiwi house values and believed another 10 per cent drop was possible in 2023.
That would be greater than the 10 per cent drop during the GFC, but would mean house prices were still higher than they were before Covid.
Valocity’s James Wilson also expected continued falls but said they would likely become milder or even flatten over 2023.
Economist Tony Alexander reckoned there would be more falls but also that there were increasing signs the market was turning and that it wouldn’t collapse in 2023.
What to watch in 2023? The number of homes selling
“It’s been striking just how weak sales activity has been this year, as buyers have taken their time to decide about purchases and vendors have also been able to ‘sit tight’ too,” CoreLogic’s Davidson said.
Falling prices meant buyers had been holding off on buying in the hope of snagging better deals later.
That contributed to annual sales falling 29 per cent.
Economist Alexander picked demand was slowly turning around. There were 19,000 homes on sale nationally at the start of December 2021, he said.
But as buyer demand slackened, the number of homes on sale climbed to 28,400 in August this year.
However, with fewer people putting their homes up for sale, that had now dropped to 26,500 and was likely to continue falling.
Still, Valocity’s Wilson didn’t anticipate a big uptick in sales next year.
“We’re seeing more properties come to market off the back of spring and we expect that to continue into summer, but we’re not necessarily seeing them flying off the shelf.”
Migration, demand for new-builds
Alexander also pointed to migration as an area to keep an eye on.
Falling migration during Covid played a role in buyer demand slumping, until, in late 2021, net migration hit “minus 14,000 and worsening”, he said.
However, by October this year migration had risen to minus 4000 as more people began to enter the country, a trend that should help boost demand.
Problems in the construction sector might encourage buyers to look for existing homes rather than new builds, potentially boosting demand.
“Potential buyers have become scared of committing to new-builds because of the growing list of building business failures and the highlighting by media of lifetime savings lost by purchasers left out in the cold,” he wrote this month.
Who will buy and sell?
Valocity’s Wilson said first-home buyers would likely still be on the hunt for opportunities next year.
“Less competition from investors means they will be able to stay more active in the market, and keep their share high, even if the actual number of deals falls away,” he said.
“Investors are very sensitive to interest rate increases, and while we couldn’t say with confidence their share of the market will decline significantly from current levels, they will be under pressure.”
CoreLogic’s Davidson agreed, saying first-home buyers had increased their share of purchases from 20 per cent earlier this year to about 25 per cent now.
Home loan interest rate rises
Home buyers could expect interest rates to keep rising with the Reserve Bank signalling it expected to further raise the OCR to fight inflation.
The rising rates, combined with an increased cost of living, would continue to make life tough for homeowners, pundits said.
That was especially the case for those who fixed on ultra-low interest rates and would have to refix at rates well above 7 per cent, resulting in bills potentially tens-of thousands of dollars higher.
Valocity’s Wilson said buyers might have been scared, not only by the Reserve Bank’s predictions of further rate rises, but also its warnings of a possible recession and rising unemployment.
Inflation and unemployment
“Inflation is the elephant in the room and won’t disappear overnight,” Wilson said.
“But while cost-of-living pressures are reaching across nearly all parts of our daily lives, we’re actually not seeing a significant drop in spending and that’s probably because a lot of people still haven’t had to fix their mortgage at a higher rate,” he said.