House price falls not a big concern

New Zealand’s housing market correction has been comparatively orderly. But that’s not the only reason falling prices are viewed with more optimism than concern, writes Miriam Bell.

Falling house prices do not worry New Zealanders as much as the cost of living and inflation do, and that is because of concerns about housing affordability, experts say.

Since the housing market boom peaked in late 2021, prices have been falling, and nationally they are now down 16.2% from the peak, according to the Real Estate Institute’s latest figures.

There is little sign the falls will stop any time soon, with new CoreLogic figures showing prices nationally were down another 1% in February.

For some, price falls raise the spectre of market crashes, such as those in the United States and Ireland during the global financial crisis.

But, to date, New Zealand’s housing market correction has been orderly, and a recent Stuff NowNext survey shows falling prices are viewed with more optimism than concern by most people.

Here’s what people think about house price falls

Seventeen per cent of the survey’s respondents were worried about falling house prices, but 48% felt neutral about them, while 32% were optimistic about them.

Among respondents in the age groups 18 to 24 years and

25 to 34 years, optimism was particularly pronounced, at 53% and 43% respectively.

In contrast, 83% of respondents were worried about the rising cost of living, while 76% were concerned about high inflation. Rising interest rates were a worry for 55% of respondents, but 32% were neutral about them, and 12% were optimistic about them.

The survey, which was conducted online in the last week of January, had 3901 respondents. They were a nationally representative sample of New Zealanders, with 66% being homeowners and 29% being renters.

Valocity head of valuation James Wilson says the sentiment is one that the property market sectors he works with, primarily valuers and banks, are reporting too. Not surprisingly, the group that is most positive about falling prices is first-home buyers, who are looking to get into the market, he says.

‘‘But, anecdotally, there is another group who are strongly supportive of price falls. They are best described as ‘parents of first-home buyers’.

‘‘They are an older age group who are comfortable with their equity position and the assets they own and like the idea of the next generation being able to buy and achieve the same.’’

While the sentiment is evident in a wide range of market participants, it is not universal, he says.

‘‘In particular, people who bought their first home recently have a different perspective.’’

Why are house price falls less of a concern?

There has been a big shift in people’s views on house price falls in recent years, Infometrics principal economist Brad Olsen says. ‘‘Even five years ago, rising prices were almost universally seen as a good thing. That has changed, and polls have increasingly found that people want prices to come back down.’’

Price falls may not be attractive to some homeowners, but growing numbers are realising how out of whack the market is in terms of affordability, and what that means for their children or grandchildren, he says.

‘‘New Zealand now has its lowest rate of homeownership in 70 years, and many people can see that where prices are is not good for society or the economy, and they feel it would be bad for them to skyrocket up.’’

Olsen says the shift has come about because the pandemicprompted market boom in 2020 and 2021 took prices much higher than anyone expected and exacerbated existing affordability challenges.

Recent price falls may be the biggest the country has had in decades, but prices are still much higher than before the pandemic, he says. ‘‘That means many homeowners can ‘afford’ for prices to fall a bit. At the same time, housing affordability remains stretched for many, and people recognise that.’’

AdviceHQ director David Green says first-home buyers definitely see lower prices as a positive development as it gives them a lower price point to get into the market.

Are house price falls making the market more affordable?

Mortgage servicing test rates have jumped by about 50% in the past 12 to 18 months in line with rate rises, and so affordability has not really changed that much, Green says.

‘‘What the price falls have contributed to is a more balanced market than that of two years ago, one which enables people to operate in a more measured fashion.

‘‘There is more choice of properties, and less competition for them, so that gives people more time. They can get building reports and do more due diligence, and that is a positive thing for buyers.’’

Green says this benefits firsthome buyers as well as people trading up, as they are buying and selling in the same market.

House price falls should not make first-home buyers much more confident, Olsen says. That is because mortgage and testing rates are higher, and it has become far harder to get finance.

‘‘The house price-to-income ratio may have improved, but you still need a mortgage in order to buy. And if you can’t afford to service a mortgage, because everything costs more, it is like being given something on one hand, and then having it taken away on the other.’’

Not everyone thinks house price falls are good

Homeowners who bought their property during the past two to three years are not likely to see falling house prices as a good thing, Wilson says.

‘‘Many first-home buyers who bought at the peak of the market, with a low deposit, are going to be nervous about their equity position.

‘‘Likewise, investors who bought recently and put a bit too much weight on future capital gains in their investment plan might be feeling under pressure, although rents are holding up, which helps them.’’

Recent CoreLogic analysis shows an increasing number of first-home buyers across the country have slipped into negative equity as a result of price falls.

But economist Ed McKnight, of property investment company Opes Partners, says it is important to remember the housing market moves in cycles.

Prices may be falling, and are expected to fall further, but most forecasts suggest they are about two-thirds of the way through the fall, he says.

‘‘Once they hit the bottom, they will start to recover, as it is all part of the cycle.

‘‘That is why if someone is in negative equity but can afford to service the mortgage, they should sit tight and hold, because prices will pick up again eventually.’’

For people in a position to buy now, the quieter market offers opportunities. Further price falls, which are likely to be moderate, should not put them off, he says.