House Prices

House price rises revised upwards

ANZ reckons house prices will now lift 4% over the second half of this year. This is up 1% from its previous forecast of 3%.

Tuesday, September 26th 2023

Applying the bank’s forecast for growth in the national house price index to the median sale price implies the median home selling for about $812,000 by Christmas, up from $780,000 currently.

In its latest Property Focus, the ANZ says house prices will rise at their current pace until autumn next year. Chief economist Sharon Zollner says underpinning recent momentum, first-home buyers appear to have re-entered the market after a long hiatus.

However, she doesn’t think recent levels of house price growth will be sustained over the second half of next year, as unemployment rises while interest rates remain high.

“Our outlook is for annual house price inflation to come in at about 5% over next year, then moderate to about 3% in 2025. If upside housing pressures result in upside CPI inflation pressures, the RBNZ is likely to respond with hikes, stopping the housing upswing in its tracks.

House prices have been moving higher at a steady pace, rising 0.7% in each of the past three months, REINZ data show. Annualised, that’s 8.7% p.a. While each of these monthly rises have only been slightly above ANZ’s expectations, collectively, they show the housing market has more momentum than we previously thought, Zollner says. 

“First-home buyers tend to be income-rich and asset- poor. They tend to be younger and have well-paying jobs, but likely found the deposit required to purchase a house got ever more out of reach during the house price bubble of 2021. While house prices have been falling, these prospective buyers have been growing their deposits and may have been holding off buying in case house prices fell further.”

Now that house prices are 14.5% below their peaks, the deposit first-home buyers require is looking more attainable. For example, a home that was worth $700,000 in November 2021 will only sell on average for about $600,000 today, meaning that at an 80% loan-to-value ratio, the prospective buyer’s required deposit has shrunk from $140,000 to $120,000.

But there are also many first-home buyers whose incomes are not able to service a 7% mortgage rate, even if they have the necessary deposit. On the hypothetical $600,000 house from earlier, this mortgage would require $2,800 per month in interest payments with an 80% LVR. This is double the $1,400 per month in interest payments needed in November to purchase a $700,000 house when mortgage rates were about 3%. In a nutshell, the constraint on first-home buyers entering the market has switched from deposit size to servicing cost as house prices have fallen and mortgage rates have risen.

It's unlikely to last

Zollner doesn’t think recent levels of house price growth will be sustained over the second half of next year. “We expect some of the house price growth will be caused by positive sentiment, which has been characterised recently as ‘fear of missing out’ (FOMO) or ‘fear of over paying’ (FOOP). With the market clearly have rounded the corner, FOMO could make a comeback. If so, we doubt it will last, given upside interest rate risks, and unemployment expected to rise.

“Once mortgage rates begin to subside, we expect house price growth to return to its long-run average of around 6% year-on-year. However, it should be noted that any forecast that far into the future is a best guess and should be interpreted as indicative only.”

Risks to the outlook

House price forecasts are always uncertain beyond the near term. The market is known for its big swings, and significant tail-end risks remain (i.e. things that could happen, but in Zollner’s opinion are not the most likely thing to occur). Right now, she sees three broad categories of risk to the outlook:

Migration: The recent migration cycle has been extreme, caused in part by the border closure and in part by the overheated domestic economy, with firms desperate for labour. ANZ has made a slight upwards revision to its migration forecast, but still expect the migration burst to slow as pent-up demand subsides. However, there remains considerable uncertainty on how quickly this takes place. Zollner says if migration cools more quickly than the bank expects, for example, house price momentum may soften faster.

Election uncertainty: A loosening in housing policy on the other side of the election poses upside risk to the bank’s forecast. “We have assumed government policy settings remain in place for the foreseeable future (which is the same approach both the RBNZ and Treasury take). But some party policies have the potential to push house prices higher than otherwise, such as reintroducing interest deductibility for investors, changes in land- use settings or allowing foreign buyers to purchase homes,” Zollner says.  “It’s entirely possible that market participants may even be speculating on these policies, and that could already be impacting the market.”

Mortgage rates: This economic cycle has been rapid. The RBNZ has had to work overtime to ease inflationary pressures through raising interest rises. Mortgage rates have risen over 5% in the past two years or so.

If the economy fails to slow sufficiently to cool core inflation, the RBNZ may be forced to respond with a higher OCR than anyone is forecasting. And this will be expected to put the brakes on the housing market pronto.

Alternatively, if the labour weakens significantly more than expected based on the monetary tightening already in the tin, forced house sales may pick up just as prospective homeowners may find they don’t have the income security to enter the market or to upgrade their existing home.


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