House prices on ice as banks downgrade forecasts

Thursday, 27 June 2024

Two of the big banks downgraded their house price forecasts this week, and that suggests last year’s recovery could have been a “dead cat bounce”, experts say.

ANZ announced on Wednesday that it was cutting its house price forecast for this year to 1%, from 3%, due to recent market data which was weaker-than expected.

In the latest Real Estate Institute figures, its house price index was down 0.4% in May, prices were “soggy for most of the country”, and sales fell 9.5% in seasonally adjusted terms, the bank’s economists said.

“Inventories continue to lift, suggesting downward pressure on prices will continue for a while yet.”

ANZ now expected prices to increase 4% next year, down from its previous forecast of 5%, but maintained its forecast for 5% growth in 2026.

The economists said the changed forecast was only a tweak in the big picture, and was best thought of as a slight delay to their previous expectations.

They expected modest growth, with gradually falling mortgage rates offset by softening household income prospects, including job security fears, as the labour market cools.

Overall, the market remained orderly, with very few forced sales, and steady if lowish sales, they said.

“While sellers and real estate agents would no doubt prefer a little more verve, it is contributing to at least no worsening in housing affordability, and isn’t standing in the way of OCR cuts.”

ANZ’s call came just a day after Westpac announced it was significantly revising down its house price expectations.

Westpac had previously picked prices to increase by 5.8% over 2024, but now it expected prices to increase by just 2.1%, the bank’s economists said.

“Prices did pick up slightly from around May 2023 until the election and we did see some modest price growth in the first quarter of 2024 that was close to expectations.

“But momentum in the housing market has decidedly slowed since around the middle of last year.”

Sales volumes remained modest, while listings had increased, and a key factor against house price growth and activity was the Reserve Bank’s policy of keeping interest rates high for longer, they said.

That had led the bank to scale back its expectations for this year, but it had a more optimistic view for prices next year, and expected them to rise 6%.

“House prices will benefit from lower interest rates in 2025, and ongoing housing shortages as construction remains weak and population growth continues,” they said.

CoreLogic chief property economist Kelvin Davidson said he had been describing the market upturn as “underwhelming” for some time, but it looked as though “upturn” might be too strong.

Last year’s recovery might have been a “dead cat bounce” that was sentiment driven, and it had now tailed off as job losses increased and interest rates did not start to fall as many expected, he said.

“Are we on the cusp of a mini-downturn? It’s probably more a continuation of a softer market, and the recovery was a bit of a blip where people got ahead of themselves.”

CoreLogic’s expectations for price increases this year had always been conservative, as mortgage rates remained high, affordability was still an issue, and debt-to-income ratios were coming, he said.

“We didn’t anticipate the rise in listings, which has been bigger than expected, and as sales remain modest, it has boosted the stock on the market, and given buyers’ pricing power.”

Davidson said price growth this year was likely to be flat on an average level, and there was renewed weakness in Auckland and many of the main centres.

Next year was likely to be a bit brighter as cuts in mortgage rates were likely, and that would boost mood and prices, he said.

“We might see 12 to 18 months of a reasonably subdued market, with about 0% price growth this year and maybe 5% next year.”

There was a similar market in the years after the global financial crisis when it took about five years for prices to return to pre-GFC levels, he said.

“The trajectory was like a bathtub – it went down steeply, then it was flat for a long time, but with a small burst of growth around 2010, and then it just bubbled along until eventually there was a more sustained recovery.”

But a relatively subdued market was probably a good thing as it was not possible to keep stretching affordability forever, Davidson said.

“A period of flatter house prices is not bad. Most people would be pretty happy with that.”

CBRE executive director Zoltan Moricz said the Auckland market could be in the midst of a double dip cycle, as this time last year the outlook for it was quite positive, but it did not look as positive now.

At CBRE’s residential symposium this week, he said double dip cycles where there were false recoveries followed by a dip had become more frequent.

“There was one after the global financial crisis (GFC), and one in the late 1990s, and the length of time involved was around three years.”

The market had not experienced an acceleration in sales in recent months, while inventory was getting high, and was now at levels second only to the GFC era, Moricz said.

“Over the next couple of quarters there will continue to be some softness in the market, but compared to the GFC and the 1990s downturn it looks like it will be relatively short lived.”

That was because inflation appeared to be starting to come under control, and interest rate cuts were expected to start in 2025, and could be more substantial than the Reserve Bank was indicating.

“We see growth returning from the June 2025 quarter, and it will continue into 2026.”