“House prices in December last year were 46% above their average level in May 2020 as we emerged from the first nationwide lockdown. Such an extreme increase over less than a two year period can be put down to record low interest rates being paid by borrowers and offered to investors, a temporary population surge, rising construction costs, switching of spending from offshore travel, and a surge in FOMO – fear of missing out – not seen for many years in the housing market.”

Things are now heading in the other direction for a while. Average house prices fell 1.5% in December and 1.1% in January and there is a good chance that from peak to trough average prices will fall by around 10%. But it pays to recognise something extremely important before considering how you might alter your home buying or selling plans in response to such an outlook.

This is exactly the price decline forecast made by almost all us forecasters exactly two years ago – and 100% of us were drastically wrong. None of  us anticipate being so wrong this time around.

It pays to recognise that the range of factors about which we are guessing is very strong and to allow for that we need to step back and remember the key underlying fundamentals.

1. Excessive monetary policy stimulus is being removed, but excessive restraint is not being applied. Mortgage rates are likely to go above 6%, but this will only take them back to where they were seven years ago. And all people borrowing from a bank in the past decade have had their loan made on the basis that they could afford an interest rate of at least 6.5%. So, much as rising interest rates will bring housing market restraint, a crunch as such from higher debt servicing costs is unlikely. Having said that, some recent buyers may have to cut back quite strongly on their spending in other areas such as eating out and holidaying for a while.
2. The labour market in New Zealand is exceptionally strong with plenty of opportunities available for skilled and unskilled people. Ability and willingness to service one’s mortgage and remain engaged in the search for a home are going to remain strong over the next two years. This will provide a substantial offset to the negative of a likely loss of many people to Australia because of the boom in their economy and labour market.
3. Construction costs are rising. The positive of this is that it will insulate the extent of the house price correction back to more realistic levels. One final point is perhaps worth making as a warning not to over-extrapolate the price falls recorded over December and January. The new rules in the Credit Contracts and Consumer Finance Act mean banks cannot take someone’s word that they will cut spending on clothing, eating out etc. when they have a mortgage to service. So, young borrowers have learnt that to get a mortgage they need to prove ability to exercise restraint over at least a three-month period.

We are in that three-month period of restraint for many right now and as these young people gain the ability to step forward with at least three months of good bank statements, credit will start to flow more freely again in the housing market. Overall, the boom ended late last year, and we are now in a corrective phase for housing markets around the country. But with good support from a firm economy and job market particularly, maintaining a long-term perspective rather than trying to pick exactly where things head in coming months is likely to be the best strategy for most buyers and sellers in residential real estate.

Article by Tony Alexander

Independent Economist

Article also appeared in FMT March 2022 newsletter

This article is general in nature and not designed to provide legal or other advice and independent advice is always recommended.

http://www.tonyalexander.nz/