Reserve Bank suggests 9% drop could return house prices to 'sustainable level'

Thursday, 30 June 2022

Affordable prices and sustainable prices are not the same thing, Reserve Bank chief economist warns.

The Reserve Bank is suggesting a further drop in house prices of about 9% could bring prices down to a “sustainable” level, even if that meant housing remained unaffordable for many.

Chief economist Paul Conway said in a speech delivered to the National Property Conference on Thursday that a 15% drop in prices from “peak to trough” should return prices to a roughly sustainable level.

Average house prices had already fallen by 6% from their peak by the end of last month, according to data from Core Logic, which would indicate the decline that still had to occur would now only be in single digits.

Conway said sustainable house prices, meant prices that were “consistent with market fundamentals”, such as the alternatives to owning a property, the longer-term outlook for interest rates and expected future supply and demand conditions.

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“Importantly, ‘sustainability’ and ‘affordability’ are very different concepts,” Conway said.

“While sustainability is determined by fundamental drivers in the housing market, affordability is about where the cost of purchasing a house sits relative to the income of the home-buyer.

“Unfortunately for many New Zealanders trying to buy a home, the current level of sustainable house prices – determined by market fundamentals – is still by no means affordable,” he said.

The Victoria and Otago university educated economist was appointed chief economist at the Reserve Bank in March, after previous spells with BNZ, the Productivity Commission and the OECD.

Conway identified a range of factors had made house prices “prohibitively unaffordable for many”, with the short term of management of interest rates by the Reserve Bank being only a minor factor.

Much more significant was a glut in savings and low productivity growth which appeared to be behind the long-term trend towards lower interest-rates globally.

That had been compounded locally by a lack of a capital gains tax on some housing gains, high and rising construction costs and past strong immigration, he suggested in his speech.

But Conway said there was some reason to think that what the central bank currently viewed as sustainable house prices might come down over time as immigration and tax settings changed and planning rules and the building supplies market were reformed.

Housing market dynamics in future were unlikely to be the same as in the past and, given the importance of housing to the economy and the “national psyche”, that would be a huge change, he said.

“For several decades, we have traded houses among ourselves at ever-increasing prices in the belief that we were creating prosperity.

“But the tide may well have turned against housing being a one-way bet for a generation of Kiwis,” he said.