House price falls coming soon

House prices are likely to fall further, and sooner, than previously forecast. Miriam Bell reports.

This week the Real Estate Institute reported nationwide median prices up 20.5 per cent year-on-year, to $880,000 in January, although prices dipped 2.2 per cent from December.

The institute’s figures showed a big slump in sales activity, and commentators say it is evidence the market has finally turned a corner and is now easing off fast.

Westpac is picking the biggest fall in prices. It has forecast a cumulative 13 per cent drop, starting from the second half of this year and running through next year to 2024.

The bank’s acting chief economist, Michael Gordon, says the bank has expected moderate price declines since late last year. ‘‘But the timing of that turn boiled down to when rising mortgage rates started to weigh on what people were willing to pay for a house.’’

It was always a question of how much momentum was left in the market before it would cool, he said.

Besides mortgage rates, tighter loan-to-value limits and new lending rules are also weighing on housing demand and contributing to the slowdown.

But Gordon says it will take several years for prices to get back to where they were at the start of last year.

‘‘Even with price falls of the size we are forecasting, the vast majority of property owners will still be ahead of what they paid. It is those who bought at high prices over the past year who will be losing a bit of equity, but most will still not go into negative equity.’’

ANZ is predicting prices to decline by 7 per cent over the coming year, as a ‘‘lengthy list of headwinds’’ impact on the market.

These include rising mortgage rates, a tighter lending environment, significant new supply coming online, an increase in listings, and shifting buyer-seller expectations, ANZ chief economist Sharon Zollner says.

‘‘They have created a perfect storm, and it is clear the market has turned a corner. But the tight labour market, and robust household incomes, will keep a floor under prices, as it’s hard to see lots of forced sales which would drive prices down meaningfully.’’

This suggests limits to how large a ‘‘correction’’ the market is likely to see, unless there is an unexpected global economic shock, she says.

‘‘We would characterise a 7 per cent fall as a soft landing, given the exceptionally high starting point for prices. They have gone up around 40 per cent since Covid hit, so this sort of drop is not significant for most homeowners.’’

There will be pockets of pain, particularly for recent buyers, Zollner says. ‘‘But even with mortgage rates rising, servicing costs remain much lower than they were in 2007 and 2008 during the global financial crisis.’’

BNZ economists are reluctant to make a definite forecast, but they assume they will fall by somewhere between 5 and 10 per cent over the next couple of years.

The bank’s chief economist, Paul Conway, says it is unlikely there will be ongoing price inflation in the housing market, because mortgage rates are going up, population growth has slowed dramatically, and the country is experiencing a building boom.

‘‘We will see an ongoing softening in the market, and prices starting to go backwards. I’m in the ‘greater affordability required’ camp, so it would be good to see prices become more consistent with that.’’

There is no way the current value of houses can be justified, BNZ head of research Stephen Toplis says. ‘‘Prices are unsustainable, but we have generated a perfect environment for a correction.’’

A substantial drop off in demand relative to expectations, combined with an increase in supply, rising interest rates, tighter lending restrictions and the uncertainty of Omicron, means prices cannot keep going up forever, he says.

‘‘But once prices do fall, the question becomes how long will it take before they return to where they were before the fall? It could be three or four years, and if there is wage growth of about 4 per cent a year over those years, affordability will improve by 16 per cent in that time.’’

A moderate drop in prices, followed by a slow recovery and moderate wage growth would be the nirvana outcome, Toplis says.

ASB has revised its price forecast down to a 6 per cent fall over the year to December. Previously, it was picking a 4 per cent decline.

ASB senior economist Mike Jones says the figures confirm the wind is coming out of the housing market sails earlier than expected.

There are likely to be small price falls in the first three quarters of this year, and then a slight recovery in the last part of the year, he says. ‘‘Over next year, prices might rise by up to 7 per cent, but it’s hard to forecast that far ahead.’’

Overall, the fundamentals of the Kiwi economy are pretty good, with a strong labour market and migration set to pick up again once the borders open, he says. This provides support for the housing market. ‘‘A period of easing prices will allow some pressure to come out of what has been an overstretched market and leave it a bit more balanced.’’

Jones says the increase in new supply and listings of houses for sale has been critical for the turn in the market. ‘‘It means supply is catching up with demand, which aids balance and also helps buyers.’’

Kiwibank is expecting a sharp fall in price increases, with prices going backwards by 1 per cent to 2 per cent by the end of this year.

A downward trend in the market has become cemented, and sales activity has fallen in every region, Kiwibank chief economist Jarrod Kerr says.

It is clear the market is finally responding to the policy decisions thrown at it last year, he says. These include new investor tax policies, tightened LVRs, and increasing mortgage rates.

‘‘But the Credit Contracts and Consumer Finance Act changes appear to have unintentionally tipped the market over the edge, as it is now more difficult to get hold of a new mortgage.’’

Kerr says an expected jump in new housing supply should also help cool the market.

‘‘We think the lift in supply should continue, and will eat away at the shortage, which will balance out the demand-supply imbalance over the next five years.’’

But he is not picking price drops of the size others are. ‘‘My view is the market will consolidate, rather than experience a significant correction. The strong labour market will offer protection from forced sales and significant falls.’’

Prices will decline modestly later this year, and then they will start to increase by 1 to 2 per cent next year, he says.

‘‘They have created a perfect storm, and it is clear the market has turned a corner.’’ Sharon Zollner ANZ chief economist

‘‘We think the lift in supply should continue, and will eat away at the shortage.’’ Jarrod Kerr Kiwibank chief economist