House prices will take 'back seat' for Reserve Bank for some time: CoreLogic
Monday, 18 July 2022
House prices are likely to be a low priority for the Reserve Bank for some time, with continued controlled falls actually helping fulfil one of the bank’s mandates, CoreLogic head of research Nick Goodall says.
Reserve Bank chief economist Paul Conway recently suggesting a further 9% house price drop could return house prices to sustainable level, which Goodall said contributed to the outlook that inflation and the health of the economy would rank above the housing downturn.
“If prices start reducing at a faster rate, that could become interesting, but at the moment because it’s quite a controlled downturn, so I don’t think it’s causing too much concern there,” he said.
“The question would be if it starts to drop at a faster rate, and or kept going for more than they’re comfortable with, whether that’s 15% or 20%, then again the question would be what are you going to prioritise?”
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Goodall said with the cost of living increasing at its fastest rate in 32 years, the central bank would probably be focusing on reining in inflation above all else.
“It will have to continue to raise the OCR, despite the fact that when you raise the OCR it has a strong downward effect on house prices.
“They will do that ahead of worrying about what will happen in the housing market.”
An increased OCR would push mortgage interest rates higher, reducing the borrower-pool and decreasing the amount buyers’ could pay.
“Until interest rates start to plateau or reduce, it’s hard to see demand bouncing back too hard, because it’s being held back so much by affordability.”
The Reserve Bank is mandated to keep inflation between 2% and 3%, as well as maintain house prices at sustainable levels.
Prioritisation may return with negative equity
Goodall says the bank may start prioritising house prices again if a sizeable number of homeowners hit negative equity (when market value of the home fell below the outstanding amount of the mortgage).
He estimated that threshold may be crossed if house prices fell by 20% or more, with those who bought at the market peak in November with only a 20% deposit likely to enter negative equity first.
“That’s at a time when they’re paying even more in mortgage rates, too.”
Negative equity only becomes a problem if homeowners could not make mortgage repayments, Goodall said, and with record low unemployment, job losses and therefore missed payments were unlikely.
The downturn
House prices have fallen roughly 5.5% since the peak in November, according to CoreLogic data.
Real Estate Institute of New Zealand’s house price index records sharper falls in the country’s two largest cities, with Auckland down 7.1% in three months, and Wellington down 12.5%.
Over 2020 and 2021, house prices skyrocketed 42%.
Goodall said it would be preferable to not see a boom followed by a crash, but the massive increase effectively gave the Reserve Bank a cushion before price falls became concerning.
LVRs ‘likely to be relaxed this year’
Independent economist Tony Alexander said his most recent real estate survey showed buyer sentiment was as negative as it was in May, suggesting the pessimism and reservation of those buying was unlikely to dissipate any time soon.
He expected prices to keep falling for the next six months, but predicted the Reserve Bank would probably ease loan to value ratio (LVR) restriction before the end of the year, which would be aid a house price recovery.
Currently LVR restrictions require 90% of homebuyers to have a 20% deposit, while 95% of investors are required to have 40%.
He said Conway contributed to his prediction.
“We are about halfway through, so I think the Reserve Bank will be providing some relief, particularly to first home buyers, before the end of this year,” Alexander said.
‘LVRs out, DTIs in’
But Goodall disagreed, because low-LVR lending was riskier, and the Reserve Bank was unlikely to allow more risky lending during a market downturn.
Even if LVRs were relaxed, he said buyers would be less willing to buy a home with a small deposit when the market was falling.
“Releasing LVRs on the way down might not have the same effect as on the way down,” he said.
He also said there was increasing discussion of debt to income restrictions coming in, and he expected LVRs to only be relaxed when debt to income restrictions were imposed, which was likely to happen next year.