House prices take a bath in the property price ‘bath tub’

1. The correction in house prices rolls on

The CoreLogic House Price Index showed a 0.8% drop in average property values in May, after the same-sized fall in April too. But as always, the regional differences are at least as interesting as the headline average, with the latest figures confirming a steady decline in Auckland, Hamilton, Wellington and Dunedin, but broad stability in Christchurch. To be fair, the latter is not immune to wider forces such as rising mortgage rates and a tighter credit environment. But at least a better starting position for affordability arguably gives Christchurch (and Canterbury) some protection.

2. Whisper it quietly …. have consents finally turned?

The latest Stats NZ figures showed that dwelling consents for April dropped by 7% from a year earlier. To be fair, I’ve been burned before in calling a turning point here – e.g. they also fell in January, only to rebound very strongly in February and March. But if we’re not at the peak now, it’s surely not far away, given rising construction costs, higher mortgage rates (so harder to finance a new-build), and perhaps some fears about people committing to a project and then seeing the developer fail prior to completion. The lack of staff and building supplies can’t help either.

3. Businesses still pessimistic and concerned about inflation

Last week’s survey from ANZ showed that business confidence remains in the doldrums, and that cost/price pressures are still a major concern. Admittedly, the numbers around employment intentions aren’t as bad, which provides a degree of reassurance for the property market – given that high levels of employment would tend to insulate it from mortgage repayment problems. But this is still a key indicator to watch each month, and the risks of recession continue to linger.

CoreLogic chief economist Kelvin Davidson: “Having a mortgage that’s bigger than the value of your house needn’t be a big deal if the debt is still being serviced.” Photo / Peter Meecham

4. A quick thought on negative equity

I’m starting to field more questions about the chances of negative equity in the housing market. For now, my answer is that it’s not a major concern yet. After all, the loan to value ratio rules that have been with us in some shape or form since 2013 provide an equity buffer for borrowers. But perhaps more importantly, let’s not forget that having a mortgage that’s bigger than the value of your house – while not great for the mindset – needn’t be a big deal if the debt is still being serviced. So once again, for as long as unemployment is low, there’s a degree of insulation here.

5. The property price ‘bath tub’

Another increasingly common question is what happens after prices stop falling. If the Global Financial Crisis is anything to go by, the answer is a long flat patch, before a slow rise – with the whole cycle looking something like a bath tub; down, long and flat, then up. Indeed, it’s often cited that the peak to trough decline in values in that episode was about 10% - but it’s less well-recognised that it wasn’t until 2012 before prices eventually climbed back to their 2007 peak.

- Kelvin Davidson is chief economist at property insights firm CoreLogic

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