‘Biggest house price fall’ since 1970s
ASB is warning that house prices could drop 20% from their peaks, when adjusted for inflation.
The housing market has been in retreat this year. Real Estate Institute figures released this week showed the number of houses sold was down almost 30% in April compared with March and the national median price dropped 1.7% over the same period.
ASB’s economists said ‘‘three big housing nasties’’ it had highlighted last year as potential risks to the housing market had arrived all at once – tighter credit conditions, higher mortgage rates and increased supply of new housing.
They said the bulk of the impact of rising mortgages was yet to be felt because it took about six months to filter through to prices. About 60% of mortgages are due to be reset in the next 12 months, including those on floating rates. Almost all would go on to significantly higher rates.
The ASB economists said it was the ‘‘credit crunch’’ of new responsible lending rules and tight LVR (loan-to-value ratio) restrictions that had ‘‘tipped the housing market scales’’. Things could soon ease on that front but that would happen as the mortgage rate pain hit.
‘‘The large and rapid increases in mortgage rates over the second half of last year will be starting to fully impact the market around now, with the impact ramping up as the year goes on.
‘‘The sheer speed with which mortgage rates have risen – among the fastest pace on record – will pose big headwinds for house prices over the second half of this year,’’ they said. In total, the ASB economists expected a 12% peak-to-trough decline, taking house prices back to where they were in early 2021 and still 27% higher than at the start of the pandemic.
But when adjusted for inflation, it was about a 20% correction, the biggest drop since the 1970s.
Westpac Bank expects a 15% peak-totrough fall.
The biggest declines were picked in Auckland and Wellington.
ASB’s economists said that while higher interest rates were unlikely to lead to widespread mortgage distress and forced sales, the ‘‘rate shock’’ would take money out of people’s wallets this year.
‘‘Much higher mortgage rates also change the calculus for prospective new home buyers or those looking to trade up.
‘‘The ‘test’ rates banks use to assess debt serviceability are where the rubber hits the road. These are rising fast in line with the broader mortgage rate trend.
‘‘Banks are now testing on rates north of 7%, up from an average of 6.3% in the middle of last year.’’
An increase in supply of new houses was also helping to depress prices, the economists said.
‘‘We expect additional housing supply to come on stream. We are now five years into a residential construction boom, and this supply bulge should increasingly show up in higher inventory and new listings numbers.
‘‘The housing shortage that has plagued the market over the past five years has been rapidly, if not completely, eroded thanks to new construction outpacing plunging population growth.
‘‘Still, the expected return of positive net migration in 2023 warns against getting too negative on the medium-term house price outlook.’’
The economists said they assumed the property market would turn and prices would start to rise again in the second half of 2023, tied to flattening mortgage rates and increasing migration.
‘‘It took two years for the housing market to build up a fierce head of steam but only a few months for the pressure to be completely released.’’