Worst slump in more than a decade is nearly over - what happens next?

1. The end of downturn is near

The CoreLogic House Price Index for May showed a fall of 0.7% over the month, similar to April, but a reduction in the rate of falls in the prior two months. Of note is the fact that the annual rate of fall has effectively levelled out at -10.2%, providing tentative evidence that the downturn may be winding up.

I’m still expecting further falls in the market to come, but perhaps more importantly is what happens after the trough is reached, rather than perfectly calling the bottom of the market. The market will remain relatively subdued on the other side of the downturn, as stretched affordability and tight investor regulations contain demand and limit growth.

2. Economy still ‘jobfull’

Stats NZ reported yet another increase to the number of filled jobs in April, up 0.6% on March and up 3.8% compared to the same time the year before. The ongoing strength of the labour market continues to boost the feeling that this will be a very unique year for the economy – a “jobfull recession” where economic growth goes backwards but people still keep their jobs. For the property market, this is likely to reduce any significant financial stress when it comes to repaying mortgages and is yet another one of the reasons we believe the end of the downturn is near.

3. Building consents continue to trend down

Building consents as reported by Stats NZ, fell again in April, with the annual running total now down to just under 46,000 (from a peak of almost 51,000). Smaller dwellings, such as apartments and townhouses, continue to contribute the greatest share of consents: 58.4% of all consents in the last year were of these types of dwellings. In Auckland, the share is almost 78%. I’ve been expecting the slowdown in consents so this isn’t a surprise but certainly one to watch as no one wants to see another bust cycle for the construction industry, especially while we go through strong population growth yet again, driven by high net migration.

CoreLogic chief economist Kelvin Davidson: “The ongoing strength of the labour market continues to boost the feeling that this will be a very unique year for the economy.” Photo / Peter Meecham

4. Improving business confidence, easing inflation expectations

There was a noticeable lift in business confidence in May, including businesses expectations for their own activity, albeit from a relatively low level. The ANZ Business Outlook survey also reported that inflation expectations eased to their lowest level since February 2022 – good news for the Reserve Bank of New Zealand and mortgage holders hoping the Official Cash Rate will in fact not need to go any higher to fight sticky inflation.

5. LVRs looser

As of Thursday June 1, the banks are now able to advance more high deposit lending to owner-occupiers and accept a lower deposit/equity for investors. I don’t expect this will have a major impact on demand and May’s transactions will be too soon to see any major change but CoreLogic’s data for May, out on Friday, could give an early indication if the banks started to open up to any particular buyer type in advance of the loan to value ratio adjustments.

- Kelvin Davidson is chief economist at property insights firm CoreLogic