Is it too early to call the end of house price falls?

1. Official cash rate has further to rise, but mortgages not so much

There were no surprises that the Reserve Bank pushed up the official cash rate (OCR) to 3% last week, and reaffirmed a peak in this cycle of around 4%. However, they’re also envisaging that the inflation rate will start to drop soon, alongside no economic recession or large falls in employment. So the implications for the housing market from the latest decision, I think, are pretty muted. In particular, fixed mortgage rates may not rise much (if at all), given a higher OCR is already ‘priced in’, and that the lending environment remains very competitive, with banks really focused on market share in a world where new lending flows are low.

2. Is it too early to call the end of house price falls?

The Reserve Bank’s forecasts last week also predicted further falls in property values over the next 9-12 months, taking them back towards “sustainable levels” (albeit perhaps not truly affordable for more people). But there are also some more optimistic house price views starting to emerge, on the back of recent falls in mortgage rates, a reduced new supply pipeline, and the possibility of a change in government next year and potential reversal of housing tax changes. As a typical economist, I can see merit on both sides! But for now, it’s hard to see house price falls ending this year – because the rises already seen in mortgage rates mean that new borrowers can’t get as much money and existing borrowers also have to tighten up – however a floor is likely on the cards for 2023. A continuation of low unemployment remains key to that view though.

3. Economy continues to bumble along

For now, any risks of mass job losses still seem relatively low. Indeed, the economy continues to tick along, not surging, but also not going backwards – the NZ Activity Index (timely indicator for official GDP) grew by 0.8% in the year to July. This modest growth is underpinning jobs, and in turn, that’s also something of a backstop for the housing market.

CoreLogic chief economist Kelvin Davidson: "There are some optimistic house price views starting to emerge." Photo / Peter Meecham

4. Still lots of gain, but also a little more pain

The CoreLogic Pain & Gain Report released last week showed that property resellers got a price higher than what they originally paid on about 98% of deals in Q2 2022, with a median resale profit of $370,000. These figures are clearly still high (often reflecting a typical hold period of 7-8 years), but they have started to weaken as the wider market drops. The ‘pain’ side of the equation, i.e. selling for less than originally paid, looks set to creep higher in the coming quarters, not necessarily due to a swathe of forced sales, but just due to unfortunate changes in personal circumstances (e.g. divorce) which mean properties need to be sold sooner than originally intended.

5. Low lending flows and tight LVRs?

Looking ahead, the Reserve Bank will publish aggregated mortgage lending figures for July on Wednesday. Total lending activity across new loans, top-ups, and bank switches will have stayed pretty low last month, given we already know that property sales volumes were soft. But my interest lies with the breakdown by loan to value ratio (LVR) – high LVR finance dipped in June, and there hasn’t been much to suggest that banks eased up greatly over July (or into August). We’ll see what the figures show.

- Kelvin Davidson is chief economist at property insights firm CoreLogic

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