No turning the corner on house prices

In its latest Property Focus, the ANZ says the housing market is about two thirds the way through a 15% peak-to-trough decline.

Mortgage rates are still lifting, housing scarcity has been eroded, and affordability remains dire - albeit a little better.

Importantly, says ANZ’s chief economist Sharon Zollner, if the market does put out any green shoots while the labour market remains tight and Consumer Price Index (CPI) inflation is too high, the Official Cash Rate (OCR), and consequently mortgage rates, will likely need to go higher than otherwise.

Prices have been slipping a little more than 1% per month on average since late last year. The bank’s forecast is for monthly declines to continue at roughly this pace for the remainder of the year, before gradually finding a floor over the first half of 2023.

“That might sound drastic, but given the exceptionally high starting point, it’s very much soft landing stuff,” says Zollner. 

“Following the 45% house price surge in the wake of the pandemic, a 15% dip is hardly a big correction. But it’s important to note that while house prices are falling, other prices - not just CPI, but also rents and wages - are rising, further reducing the relative price of houses,” she says.

Zollner says while the post- pandemic surge took the housing market to the next level in terms of unaffordability - typically defined as house prices relative to incomes and rents - affordability metrics are now improving from both sides of the ratio. “The numerator (house prices) is doing more of the work, but a 7% increase in average hourly earnings isn’t exactly chump change when it comes to improving the affordability of houses either.

“Of course, there’s a lot more to household income than just hourly wages, and it’s a complicated dataset for Stats NZ to gather. Rents data is pretty timely, and it shows the house-price-to-rent ratio has fallen from a recent peak of just under 33 times annual rents to slightly above 29 times as at July.

“That’s still stretched, but a considerable improvement – about a 12% improvement, in fact,” says Zollner. “Broadly, however, it would certainly be a push to look at current affordability indicators and conclude New Zealand housing is now affordable. It’s just a little less dire.”

The report says new housing supply continues to play catch-up with new demand, meaning the housing deficit is rapidly eroding – by the bank’s estimates to the tune of 65,000 houses since the border was closed. This is particularly the case in Auckland.

Zollner says the housing market may not always follow fundamental supply-demand imbalance in the short run, but it is a significant anchor for the longer-run picture, and it suggests limited scope for significant price rises when the mood does finally turn.

“Broadly, it’s this mood people need to keep an eye on, as it will likely have a lot to say over the coming months. We’ve spoken about the animal spirits component of housing outcomes many times before, highlighting that FOMO (fear of missing out) and FOOP (fear of overpaying) are merely characterisations of the extremes of this. And with recent anecdotes suggesting buyer interest has been picking up lately in some regions, from very low levels, the strong lift in house sales last month may well represent a portion of buyers who think this is a good time to get ahead of the market before it tightens again over summer,” says Zollner.

“Just because buyer interest picked up a little early this year, that doesn’t necessarily mean the overall market is tightening. As mentioned, listings also tend to rise over the spring, meaning the true test for the market still lies ahead. Higher trading volumes over spring and summer will certainly hasten the pace at which the market clearing price is discovered, but at this stage we’re not at all convinced this is pointing to a change in direction.”