House Prices

Tough headwinds and greater fall in house prices

The ANZ bank expects house prices to now fall 15% compared to its previous expectation of 12%.

Wednesday, July 27th 2022

Bigger falls are based on a predicted rise of the official cash rate (OCR) to 4%, which will mean higher mortgage interest costs leading to sinking house prices.

ANZ’s latest Property Focus says the second quarter CPI figures suggest high core inflation may stick around longer than previously thought.

The REINZ House Price Index (HPI) has fallen 6.6% from its peak in November last year, with monthly declines ranging between -1.4% and -0.6%. Annual house price inflation in now running at 3.6%, on a three-month moving average basis; that’s more than 25% slower than its recent peak. The bank expects this measure will turn negative in next month.

Meanwhile, indicators of market tightness continue to ease. New listings are back to their typical seasonal pattern, but softening sales mean housing inventories are rising. Inventories are now at a six-year high, and getting higher. Unsurprisingly, the number of days it is taking to sell a house is also higher.

Combine slowing population growth, with a still-respectable level of residential investment - despite labour and materials shortages -  and the resulting supply-demand balance suggests that when the market does find a floor, there could be significant limits to how much prices will lift again as the market recovers.

All up, the suite of housing indicators ANZ monitors is still on an easing trajectory, with no “floor” to speak of yet in sight, says chief economist Sharon Zollner.

“It’s not just the data telling us this; anecdotes from the coal face seem unified in suggesting the housing market is firmly in retreat.”

Affordability

Fortunately, falling house prices and a tight labour market mean affordabilbilty it’s now on an improving trajectory. But how much will it improve?

ANZ’sr forecast for a 15% fall in house prices alongside above-average growth in household incomes over the next couple of years should mean the ratio of house prices to incomes dropping from a peak of almost nine times income, to 6.75 times income.

“That’s better, but still higher than the pre-pandemic read of around 6.5 times, which was already considered unaffordable,” says Zollner.

She says there are obviously a huge number of variables on both the demand and supply side that will go into determining whether, and how, housing affordability continues to improve from there.

“But there’s a pretty stark choice: house prices underperform relative to incomes over a long period - or more dramatically over a shorter period - or housing remains unaffordable for decades, with all the societal implications that brings.”

Zollner says all up, a housing market in retreat is a double-edged sword, depending on what side of the fence people sit: locked out, or hoping for a capital gain.

It’s particularly bitter for recent first-home buyers who are seeing both their interest cost rise - on a high level of debt - and their house value drop below what they paid. But there are indirect economic implications of falling house prices too: lower demand for residential construction and durables consumption; lower demand for labour in the above industries; reduced household wealth and housing equity; and negative consumer and business sentiment implications.

“These suggest it might be hard to achieve consecutive years of solid household income growth while house prices are falling. But if we are in for a hard landing in both housing and the broader economy, the still-high starting point suggests housing has a lot further to fall than aggregate incomes likely will,” says Zollner.

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