Tony Alexander: Something interesting is going to happen to houses prices at the end of 2023

ANALYSIS: The Real Estate Institute of New Zealand this week revealed that on average house prices around New Zealand in October were 0.2% higher than in September and 12.4% down from the November peak. This is a somewhat surprising result, and I wouldn't take it as an indication that house prices have actually stopped falling. One reason for caution is that when we get a measure like this getting close to zero you can easily get positive and negative numbers appearing without any real direction in prices.

Second, most of the transactions captured in the October data occurred before banks raised their fixed mortgage rates by about 0.5% following the higher than expected inflation number.

Third, we have data in hand from my monthly surveys of real estate agents and mortgage advisors showing that because of the increase in interest rates, buyers have taken a step back from the market to see how things are going to pan out. In particular, investors have run for the hills again and there is no evidence as yet that owner-occupiers are looking to follow first home buyers into the market.

The chances are strong that house prices will continue to go down for the next few months, but the scene is being set for something interesting happening possibly from late 2023 and almost certainly through 2024. Consider these factors for instance.

The data tell us that on average around the country house prices are 26% higher than they were at the start of 2020 just before the pandemic struck. That's a fairly large number and on that basis the near universal view is that house prices are excessively high in New Zealand and are going to fall a lot further.

But data from statistics New Zealand tell us that over the past year average ordinary time earnings have increased about 7.4% after rising 3.5% the previous year. House prices are falling but our incomes are rising and so we can calculate by how much the ratio of average house prices to incomes has changed from pre-pandemic levels.

At the moment that ratio is only 8% above where it was at the start of 2020. Just under a year ago that ratio was almost 30% above pre-pandemic levels. The extent to which house prices have gone beyond the pale is a lot less than people are thinking. In fact, if we allow for the long-term upward trend in the ratio of house prices to incomes things are about where that trend suggests they “should” be.

The only real reason there is downward pressure on house prices on average at the moment is because interest rates are at above average levels, there are some fears of recession, credit availability is tight, net migration flows are negative, tax rules have dissuaded investors, and many people are waiting for prices to bottom out before buying.

Independent economist Tony Alexander: “I don’t for a second read the 0.2% rise in house prices in October as a signal that the upward phase of the house price cycle is reappearing.” Photo / Fiona Goodall

Once people start losing their fears of interest rates rising further and start thinking about interest rates falling at some point perhaps from late 2023 there could be an interesting response in the housing market. The net migration numbers are already becoming less bad as a rising net outflow of Kiwis is being offset by migrants coming in.

Forecasts for how high unemployment will get are being scaled back amidst evidence of strong labour demand. Banks are bit by bit easing their very tight lending criteria. Investors meanwhile are keeping a close eye on the political opinion polls and if it looks like Labour will lose office they will likely re-enter the market in anticipation of interest expense deductibility being restored.

I don’t for a second read the 0.2% rise in house prices in October as a signal that the upward phase of the house price cycle is reappearing. But because the change followed a 0.7% fall in September, 1.3% falls in August and July, and falls averaging 1.9% a month from March through to June, the trend in the monthly changes is obvious. We are solidly in the endgame for the downward leg of the price cycle.

The real questions now for those in a position to buy but waiting for the bottom are these. How confident are you that you will see the price bottom before everyone else, and how sure can you be that the stock of listings currently 72% higher than a year ago will remain robust enough to allow you to find the property most suited to your needs?

- Tony Alexander is an independent economics commentator. Additional commentary from him can be found at www.tonyalexander.nz