COMMENT: Over the past couple of months you could be excused for thinking that the property market is about to crash. Indeed, some headlines and commentators claim that a crash is already underway.
But what constitutes a housing market crash? Believe it or not, there’s no generally accepted definition of the term. Some claim that a crash is any reduction in house prices, while for others the measure is more subjective and describes the impact on home-owners rather than the event itself. There are those who (often gleefully) predict drops of 40% or more and seem to take a perverse delight in the potential misfortune of others.
Because of this confusion, I adopted my own definition years ago, and have stuck to it ever since. I define a property market crash as a 20% drop in the median sales price from market peak, and which lasts for more than 12 months.
By this definition we last had a crash between 1975 and 1980, when house prices dropped by 38%, but it hasn’t happened again since that time, nor anything even close to that.
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But is that about to change? Is the property market about to crash, again, after more than 40 years?
No. There’s no crash coming, nor anything that looks remotely like a crash.
Over the many years that I’ve been providing commentary on the housing market I’ve made a lot of predictions, and while those predictions haven’t always been correct, there’s one topic on which I’ve never been wrong: property market crashes.
I don’t say that to boast, but simply to give you confidence in my assurance that the market isn’t going to crash now – for four reasons:
1. The Reserve Bank won’t kill inflation at any price
We know what has caused the current market jitters: the Reserve Bank’s decision to raise the OCR (which impacts mortgage interest rates) and the changes to the CCCFA. Indeed, if those things hadn’t happened, there’s every chance the Auckland market would still be overheated. But the CCCFA is in the process of being amended, and the Reserve Bank isn’t going to deliberately cause the Auckland property market to collapse. It wants to kill inflation, but not at any price.
Ashley Church: “There’s no crash coming, nor anything that looks remotely like a crash.” Photo / Fiona Goodall
2. Slowdowns in house price growth are a regular feature of the housing market
Unlike Auckland, which (based on previous cycles) should be in the throes of another boom market – the regional markets are flattening off, just as they should be doing at this point in their cycle, and I predicted as much back in January. Don’t confuse cyclic behaviour for a crashing market.
3. First home buyers will soon be back
At any given time, first home buyers account for around a quarter of all purchases in the property market, but they’ve also been the buyers who were hardest hit by the Government’s changes to the CCCFA, which means that there have been far fewer of them in the market over the past few months. However, as I mentioned above, the major issues with the CCCFA are in the process of being fixed and first home buyers are already starting to return to the market. Watch for this to impact on listing levels and stabilise house price levels as the year progresses.
4. We still have very low mortgage debt relative to the value of our residential property
One of the claims in support of a crash is that we’re supposedly in a bubble and that house prices will soon correct in order to fix this overvaluation. Some even claim that this correction will take the banking system down. The problem with this claim is that it defies 40 years of market activity in which prices have continued their upward climb. So while it’s true that the value of NZ household debt (including mortgages) have increased from $290 billion in February 2020 to $334 billion in February 2022, the value of our residential housing has increased even more - from just over a trillion dollars just a few years ago to $1.72 trillion in December 2021. In other words, our mortgage debt is secured by an enormous amount of equity. Accordingly, our banking system isn’t at any risk of crashing,
Property values may move around a bit more over the next few months as we adjust to the changes taking in the market – but any panic is seriously misplaced. The market isn’t going to crash.
- Ashley Church is a property commentator for OneRoof.co.nz. Email him at [email protected]
