Halfway through price drop – ASB
New Zealand is probably just over halfway through one of the biggest drops in nominal house prices that it has ever seen, ASB says.
In their latest quarterly economic forecast, the bank’s economists said house prices were expected to continue to fall until mid next year and the official cash rate would peak at 4% by the end of the year before falling in 2024.
Chief economist Nick Tuffley said it would be a tough year ahead for many people. ASB expected a 12% drop in nominal house prices, which would be equivalent to 20% when adjusted for inflation.
He said it looked like prices were about halfway through that fall. ‘‘When you look at the measures out there, the most up-to-date is the Real Estate Institute’s House Price Index, which is down 8% so far.’’
Prices fell about 10% in the global financial crisis, which was the biggest fall seen since the early 1960s, in nominal terms. But house prices fell about 40% in real terms in the 1970s when they stayed flat during a period of rapid inflation.
Tuffley said inflation had already peaked but it could be 2024 before it dropped below 3% again.
‘‘It’s going to take a while to get down to a sensible level, so there’s going to be a long tail. The Reserve Bank has been reacting to this by rapidly increasing the official cash rate, which we expect to reach 4% by the end of the year and remain high throughout 2023,’’ he said.
‘‘Many households with mortgages are going to feel added mortgage servicing pressure over the next year. We still have over half of fixed-rate mortgages rolling over in the next 12 months so there’s going to be people progressively feeling the impact of that even into mid next year. Eventually, though, interest rates are likely to come down, but we don’t envisage that until sometime in 2024.’’
He said consumers and businesses were feeling downbeat.
‘‘A wide range of household living costs have lifted noticeably ... In the short term, wage growth has not kept up, the upshot being that households’ purchasing power has taken a dent this year.’’
Tuffley said the country might need to recognise that some factors driving a tight labour market were due to a structural change rather than a temporary Covid blip.
‘‘On the one hand, we’re seeing continued strong wage growth which will outpace inflation next year and lift people’s purchasing power. But on the other hand, this is going to be a real challenge for employers when it comes to finding and retaining people.
‘‘It’s going to be pretty challenging this year and a chunk of next year, but then we should start to see some relief on the horizon as the housing market stabilises again and inflation and interest rates start to ease a bit.’’