Here's how long we can expect house prices to keep falling

Wednesday, 4 January 2023

CoreLogic head of research Nick Goodall describes some of the things that could make the property market downturn worse. (Video first published on November 1, 2022)

House price falls slowed in December, but the downturn is not yet over and we should expect about another eight months of price falls, property data firm CoreLogic says.

Its latest House Price Index (HPI) recorded prices falling 0.2% during December, compared to a 0.6% drop in November and a 1.3% drop in October.

CoreLogic chief property economist Kelvin Davidson said any argument this reduction in the pace of price falls showed the bottom of the market approaching was “a bit premature”.

“We have got more official cash rate increases coming, we have got more mortgage rate increases coming,” he said.

* The tiny town where NZ's house prices are rising fastest

* A 'cupboard' with wooden step listed as a 'deck' sign of hot rental market

* How do I get the best assessment of what my house is worth?

“If the economy enters a recession, and we get some unemployment, that’s not going to be a favourable recipe for the housing market.”

The market is currently enjoying a hiatus from interest rate changes, because the Reserve Bank essentially skips an official cash rate (OCR) adjustment over the holiday period.

The OCR is usually reconsidered every six weeks, but over the Christmas period that is doubled.

House prices are likely to keep falling as long as interest rates are rising.

It was last adjusted in late November following higher-than-expected inflation. It lifted 0.75% – the biggest jump in history, bringing the OCR to 4.25%.

The Reserve Bank is currently expecting the OCR to peak at 5.5%.

The next OCR decision is scheduled for February 22, and Davidson expected another 0.75% increase was on the cards, followed by another 0.5% increase six weeks later.

House buyers and sellers alike would receive the next big indication of where interest rates would go on January 25, when the next consumer price index (CPI) for the fourth quarter of last year would be released, giving an updated inflation rate figure.

“It would have to be a pretty bad number to shock people because the expectation already is that the CPI will be higher for longer,” Davidson said.

He said longer-term home loan interest rates had already factored some of the expected increases in, but shorter-term home loan rates would probably increase with the next OCR hike.

Other economists say banks had been reducing their profit margins on home loans in recent times, meaning OCR increases had not been reflected in loan rates.

Prices were likely to continue to fall as long as home loan interest rates were increasing, Davidson said.

“What we need to see is people really convinced the peak has been reached, and that then they can say: ‘This is the worst case, this is as bad as it gets, we can do our finances on this basis’.

“That’s when we will probably see some property sale activity picking up again and prices reach a trough.”

The home loan rate peak was likely to hit around April or May, which would lead to more buying, and the lowest property prices in August or September, Davidson said.

December’s fall meant values were down 5% nationally over the calendar year, by CoreLogic’s measure, leaving the average house price at $956,000 after starting the year at $1,007,000.

CoreLogic NZ head of research Nick Goodall said it was a significant turnaround after the market grew by 27.6% in 2021.

It was also the largest annual decline since June 2009 when prices fell 6.4%, following the Global Financial Crisis.

CoreLogic’s HPI lags behind other indicators, for example in November, the Real Estate Institute House Price Index was down 13.7% year-on-year.

ASB expects to see a peak-to-trough fall in prices of 25%, ANZ 22%, Kiwibank 21% and the Reserve Bank about 20%.

Davidson said based on the Reserve Bank’s prediction, the market was about halfway through its downturn both in terms of duration and overall price falls.

Wellington continues to lead the housing market downturn, with prices having fallen roughly 17% in a year.

In Auckland and Hamilton, prices had fallen just above 5%, in Dunedin roughly 10%, and in Tauranga nearly 6%. In Christchurch prices remained 1% above where they were a year ago.