The housing market is firmly in retreat, economists say
ANZ has revised its forecast for house price falls, increasing it to a drop of 15% from 12% previously.
The bank said higher-than-expected inflation in the second quarter would mean interest rates would have to increase further than they might otherwise, which would drag down house prices.
The Real Estate Institute’s house price index has already dropped 6.6% from its peak in November 2021.
Read more: NZ house prices – what's going on?
“Meanwhile, indicators of market tightness continue to ease,” ANZ economists told Stuff. “New listings are back to their typical seasonal pattern but softening sales mean housing inventories are rising. Inventories are now at a six-year high, and trending higher. Unsurprisingly, the number of days it is taking to sell a house is also trending higher. Combine slowing population growth as negative net migration threatens to continue for a while yet, with a still-respectable level of residential investment (despite labour and materials shortages), and the resulting supply-demand balance suggests that when the market does find a floor, there could be significant limits to how much prices will lift again as the market recovers.”
They said the indicators continued to suggest house prices were on an “easing trajectory” and would decline until the middle of 2023.
“And it’s not just the data telling us this; anecdotes from the coal face currently seem unified in suggesting the housing market is firmly in retreat,” the economists said. “That said, recent data hasn’t been surprising us to the downside, relative to our forecasts. In fact, the average pace of monthly house price declines since November (around 1% per month), has been slightly smaller than the 1.1% to 1.2% declines we had pencilled in. Given the ridiculously high starting point for house prices, we’d say the correction to date has been relatively orderly.”
Read next: First-home buyers may still find mortgage payments unaffordable despite falling prices
The economists warned, however, that headwinds had picked up lately, suggesting further falls in the future than previously forecasted, Stuff reported.
The consumer price index, the most important recent data for the housing market, showed an annual rise of 7.3%.
“We now expect the Reserve Bank will continue to deliver 50 basis point hikes all the way to a peak of 4% by the end of the year. That’s a full 50 basis points higher than our previous forecast OCR peak,” the ANZ economists said. “All else equal, (and looking through the ebbs and flows of wholesale rates markets), this means higher-than-otherwise mortgage rates, and therefore weaker-than-otherwise housing demand. Overall, we think our OCR call change is worth another three percentage points or so in terms of how much house prices are likely to fall, if it comes to pass, and are accordingly now forecasting a peak to trough decline of 15%.”
The economists said, however, that the housing market outlook could easily experience a sharper correction than they are forecasting, “given the added degree of uncertainty around the economy right now, as interest rates go higher, inflation remains on a tear, and borders reopen.”
And while a 15% fall in prices might sound like a lot, the ANZ economists noted that it was coming off a gain of about 45% through the pandemic.
“It can therefore be interpreted as very much a soft landing,” they said. “Our forecast indicates that prices will trough almost 25% above their pre-pandemic level. We continue to see significant downside risk to our forecast, but it would take a sharper deterioration in the labour market than we are expecting.”
The report acknowledged that it was tough on first-home buyers, who are seeing the value of their properties fall as their interest costs increase.
ANZ’s economists forecast house prices to fall at the same time as household incomes increase, which would reduce the house price-to-income ratio from nearly 9 to 6.75 – which was better but still higher than the pre-pandemic read of around 6.5 times, which was already considered unaffordable, Stuff reported.
