House price drops approaching GFC-levels of badness

1. The price downturn deepened in August

The CoreLogic House Price Index showed a 1.8% monthly fall in average property values in August and a decline since May of 3.5%. That quarterly drop is approaching the worst point of the GFC episode, when the rate of changed bottomed out at -4.4% in August 2008. At -7.6% quarterly, Wellington is the softest of the main centres, although Dunedin (-5.1%) and Auckland (-4.6%) aren’t far behind. By contrast, Christchurch and Hamilton have only edged down slightly (-0.3%) in the past three months. Overall, then, the downturn rolls on. But the signs that mortgage rates are now close to (or at) a peak could start to buoy the housing mood over the next 3-6 months, setting the scene for a market floor next year.

2. Employment continues to grow

A potential turnaround in housing sentiment over the coming months would only be made more likely by continued resilience in the labour market, which is certainly what we’ve continued to see lately. For example, Stats NZ’s filled jobs data last week showed another rise in July, this time a 0.5% increase (seasonally adjusted) after June’s 0.4% gain. There are now more than 2.3m filled jobs across NZ, up by almost 52,000 from a year ago, and nearly 97,000 higher than the pre-COVID mark.

3. Construction slowdown is here (probably)

The number of new dwelling consents in July was 3% lower than a year ago, the second fall in a row, with approvals for standalone houses the culprit (activity for smaller dwellings such as townhouses remains strong, especially in Auckland). I think it’s pretty safe to say now that the long-anticipated downturn for dwelling consents has arrived – so the question becomes, how deep could it get? We just have to hope it’s not as deep as the post-GFC slump, which took a long time to recover from, because construction firms lost a lot of staff. On the plus side, at least builders will be busy with the pipeline of consents already approved for a while yet, and with measures such as the Build-Ready Development Pathway in place, the Government seems more alert to the long-term risks this time.

CoreLogic chief economist Kelvin Davidson: "I think it’s pretty safe to say that the downturn for dwelling consents has arrived." Photo / Peter Meecham

4. The worst has passed for sentiment?

ANZ’s measure of business confidence improved a little in August, but from a very low base – and cost/price pressures are still a major concern. So as we saw with consumer confidence the previous week, there are hints that we may just be past the worst, but ‘normality’ is a fair way off yet. On the bright side, employment intentions are still in positive territory.

5. Have cash multiple property owners continued to rise?

In recent months the CoreLogic Buyer Classification data has shown a steady rise in the share of property purchases going to cash multiple property owners (e.g. investors). Of course we need to keep in mind that this rise in percentage market share is taking place in the wider context of a significant fall in the overall number of deals. But even so, in the current environment of restricted lending flows and higher mortgage rates, it stands to reason that cash buyers would be enjoying conditions. It’ll be interesting to see if these patterns have continued in August’s data, due out at the end of this week.

- Kelvin Davidson is chief economist at property insights firm CoreLogic

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