What happened last time house prices fell, and is this time different?

Thursday, 14 April 2022

Valocity head of valuations James Wilson gives his take on what property prices will do in the coming year, and what trends might emerge.

House prices are falling, and with predictions of more to come, many are thinking of the last time house prices fell – during the Global Financial Crisis of 2008.

The comparison seems valid, with the market doing today almost exactly what it did at the start of the GFC, but experts say the drivers causing the market downturn, and the environment it is occurring in, are vastly different.

Starting with the similarities, property data firm CoreLogic recently reported a buyer-seller standoff over prices had led to the lowest house sales since the GFC.

That was despite the number of homes on the market in March being up almost 159 per cent year-on-year .

**READ MORE:

James Wilson head of valuation for Valocity in Auckland. Housing data.

* Buyers have the power: Prices drop in Hamilton, Wellington, Christchurch and Dunedin

* What mortgage repayments will cost as rates rise

* Housing affordability: Who actually wins from the housing crisis?

This slump in sales also occurred at the start of the GFC.

Property data firm Valocity took a deep-dive into the period when Covid-19 hit to look for clues about how the economic shock might play out.

It found from the sales peak in April 2007, just before the GFC hit, sales declined rapidly, falling 31 per cent over four months.

House prices are also starting falling in a similar fashion to the beginning of the GFC. Corelogic data released last month shows prices had fallen about 2 per cent from their high in November, which was in line with other market analyses, including Westpac bank’s.

Valocity’s report suggests this decline matches how house prices reacted at the start of the GFC, when prices fell a little less than 3 per cent between late-2007 and the first three months of 2008.

However, while early trends may be similar, the situations are very different, says Valocity head of valuations James Wilson.

Wilson says the GFC can essentially be summarised as a banking liquidity crisis – banks were worried about their balance sheets and cut back on lending.

“It wasn’t necessarily that demand for property dropped away, it was that the banks colloquially shut the front door to lending,” he says.

Wilson says Kiwis were still willing to buy during the GFC, which led to a quick bounce back. This does not appear to be the case today.

He says a number of “ingrained forces” are at play that were not present back in 2008, including an overall unaffordability of housing – a situation made worse by house prices leaping roughly 30 per cent last year.

Next Wilson points to a general cautiousness and low consumer confidence – ANZ recently reported consumer confidence had crashed to its lowest level since the bank began studying it in 2004.

Valocity’s report highlights another factor that stopped dramatic house price falls during the heart of the GFC: banks lowering interest rates.

Roughly 60 per cent of home loans are up for renewal in the next year, and many will find their interest rate has doubled.

This is another key difference: back in 2008 banks were able to cut interest rates, making mortgages more affordable to more people which increased demand, and softened the landing for the housing market.

Today, price falls began while interest rates were already historic lows (a result of the Reserve Bank trying to protect the economy from the impacts of Covid-19) and the Reserve Bank is signaling to lenders that interest rates have to go up, and quickly, to counter the biggest cost of living increases in over three decades.

Wilson says the combination of all these factors has the potential to leave buyers unwilling to purchase for longer than they were during the GFC.

There is no single headwind that could collapse house prices, Wilson says, and prices were “unlikely to go off a cliff” with the rest of the economy strong and unemployment low.

How the many smaller headwinds combine and what impact they cause however remains the “crystal ball question”, Wilson says.

Predictions of price falls

The exact impact of the GFC on house prices is debated. The Reserve Bank reports house prices in March 2009 were 9 per cent below the year before.

David Boyle is head of sales and marketing for Mint Asset Management, and says highly indebted borrowers should talk to their lender sooner rather than later to plan for possible interest rate jumps.

Research institute Motu estimates between April 2007 and April 2011 the real house price (the amount paid for a house adjusted for inflation) in New Zealand fell by 15.3 per cent.

Real Estate Institute data shows house prices fell about 8 per cent nationwide before they started to recover.

Valocity found median house prices only fell 4.23 per cent between the months of the crisis itself, although Wilson said some areas were affected worse than others.

By comparison, Valocity is currently predicting a 5 per cent fall in values – half what the country’s largest mortgage lender, ANZ, is predicting.

Westpac is predicting a 13 per cent drop in house prices, starting late this year and running through to 2024.

The Reserve Bank’s monetary policy statement predicts higher interest rates, low net migration, changes in tax policy and tightened lending will result in house prices falling by about 9 per cent by the middle of 2024.

New Zealand’s less-privileged position

Mint Asset Management head of salesDavid Boyle has been in the financial services industry for 40 years.

He says New Zealand was in a good position for the GFC because the amount of sub-prime lending (lending to borrowers with low incomes or poor credit histories) was low compared to other countries.

Today, some risk-factors are elevated in New Zealand, including the size of mortgages relative to incomes.

In some countries, there is a cap to the size of debt-to-income ratio lending (DTIs), which works by restricting the amount someone can borrow compared to their income. If the limit was set at five, and a borrower’s income was $100,000, they could borrow up to $500,000.

In the UK banks can only lend out up to 15 per cent of new mortgages at a DTI greater than 4.5.

According to the Reserve Bank, in December almost 60 per cent of new home loans in New Zealand had DTIs over five.

Boyle says this highlights how much debt New Zealanders take on to get on to the property ladder today, and more indebted households are more vulnerable to prices inflation and interest rates rises.

He expects a lot of belt-tightening over the coming years, and a drop in discretionary spending on things like new cars and dining out, which has implications for the wider economy.

He says many recent buyers are going to get a nasty shock when they come to renew their mortgages and find their interest rates have increased significantly.

Roughly 60 per cent of home loans will need to be refinanced in the next year and for many borrowers, that will mean their interest rates doubling, according to CoreLogic.

Boyle says it’s not all doom and gloom, however, with the overall economy in good shape, which will help many weather the storm.