Do economists’ house price predictions have an impact on residential property market?
“No,” says Michael Gordon, acting chief economist at Westpac.
All of the major retail banks are predicting a correction in house prices, a sharp turnaround for the market, which had been enjoying a unbelievable hot run throughout 2020 and 2021.
The latest house price figures, from OneRoof and other market trackers, have highlighted weaknesses in most the major cities, with prices and sales volumes dropping and purchases by first home buyers way off levels seen last year.
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Gordon, himself, thinks house prices will fall 15% over the next two years.
He says most “behavioral” or “sentiment” stories about the housing market are really an attempt to put a human face on the financial forces behind it.
He says economists and house prices are responding to a big rise in mortgage rates.
“Another example is FOOP (fear of over paying) which insinuates that buyers’ decisions are fear-based and therefore irrational. But it makes sense to think about how other people’s willingness to pay might have changed, given that we’re all facing the same mortgage rates.”
Independent economist Alexander regularly polls real estate agents on the state of the market and some of the responses in his latest survey blamed falling prices on commentators and the media.
“One of the indicators that the market has solidly turned is the agents blaming the forecasters and blaming the media in particular," he says.
Alexander says it’s easy to combat the argument that forecasters are to blame. “Back in March 2020 [when Covid struck] economists were predicting house price falls of about 10%, but prices actually rose 40%. That is definitive proof that economists’ forecasts do not drive house prices,” he says.
He adds: “In November 2021 ANZ predicted that house prices would continue to rise over 2022. Westpac in the same month said they only expected modest declines in house prices, and only in late in 2022. So we're in November 2021 and there are basically no forecasts of house price declines to worry about in the near future.”
A packed Wellington auction room at the end of 2020, when house prices were rising, not falling, as had been forecast. Photo / Getty Images
Yet between October and November last year, the percentage of real estate agents reporting fewer first home buyers in the market jumped from a net 2% to a net 56% , says Alexander.
Another indicator from his surveys was the decline in FOMO among buyers. In October, 70% of agents reported seeing FOMO, but only 39% did by the end of November. “In other words, agents could see the FOMO was already receding strongly. The market was already turning before the large economic forecasters came out and said, ‘You know, these house prices could be falling away.’”
There are of course times when economists say the market will rise 5% and it does. That’s not to say they’re the cause, says Alexander. Much stronger drivers include interest rates, net migration, tax and regulation.
“I started in early 2021 to say, ‘We are in the end game for the housing market’, but I won't claim to have had an influence on investors backing away all of a sudden.”
Tax and regulation changes targeting investors in 2021 did that, he says.
Alexander notes that in November and December, just as the market was starting to turn, changes were made to the loan-to-value-ratio (LVR) rules and the Credit Contracts and Consumer Finance Act (CCCFA). “That credit crunch had an overwhelmingly large impact on a market that was overstretched anyway.”
Alexander doesn’t totally disagree that commentators' predictions can have an effect on public sentiment. “I do believe that predictions from high-profile people can have an impact on the markets and can generate concern, amongst people who don't understand all the fundamentals at play.”
It was one such comment from a high-profile journalist in 2008 predicting a 30% fall in Auckland house prices that drove Alexander to start speaking out more in public. The prediction, he says, spooked investors and home-owners, but didn’t come to fruition.
Alexander, who was chief economist at BNZ at the time, says: “That sort of information was completely divorced from the likely reality for New Zealand. My concern back then was that that sort of high-profile, extreme prediction could cause quite a reaction in the markets. And so that's when I jumped in basically to say prices might fall 10 to 15% and point out the insulating factors.”
