ANALYSIS: The great resignation refers to people leaving the workforce early having been scared by covid and decided to change their lifestyles or enter education. There is another substantial change underway which we can call the great acceleration and it is a way of understanding what is happening currently with interest rates, house prices, and even prices for other assets such as shares and crypto.
Things which only a few months ago we were generally expecting might take a few years to happen are now being brought forward and condensed in time.
The Reserve Bank was planning to generate a peak in NZ interest rates in the middle of 2024. They have now accelerated their tightening programme to achieve a peak in mid-2023. This acceleration has yet to affect house prices, which have already fallen 7.7% from their peak to be close to the 10% price fall most of us have been thinking would happen.
Instead, house price falls have been accelerated to date by the credit crunch induced late last year by changes in Loan to Value Ratio rules and the Government’s changes to the Credit Contracts and Consumer Finance Act. Also, the extremes to which house prices rose late last year mean the decline has been accelerated.
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Central banks offshore have also accelerated their interest rate rises and the desired slowdown in their economies will now happen more rapidly than previously expected. Hence sharemarkets weakening faster than anticipated as lower profits are expected to arrive earlier than anticipated.
When expectations of the future change, assets which can be quickly repriced factor in the new outlook and adjust quickly. This is important to understand because it would be a mistake to extrapolate the asset price falls we have seen recently over too long a period. Falls which might otherwise have taken 12-18 months to arrive are happening in a much shorter than expected timeframe.
The cyclical low-point in share prices is likely to be reached well before analysts were expecting just one month ago. The same goes for average house prices in New Zealand. They will hit their lows perhaps a year earlier than most of us had been thinking 1-2 months back.
Tony Alexander: “Falls which might have taken 12-18 months to arrive are happening in a much shorter timeframe.” Photo / Fiona Goodall
When might the lows occur and how much further will house prices decline? It seems silly that with all the negativity around one would expect only another 2.3% fall in house prices so they end up 10% lower. The chances look high that house prices will fall at least another 7.7% and end up around 15% below their late-2021 peaks.
So, the view I am running with is that we are half-way through the decline in house prices. Why not price falls adding up to over 20% on average? Soaring construction costs, slightly easing lending conditions, interest rates unlikely to rise as high as Reserve Bank forecasts, high job security, rents rising rapidly, and investors even more disincentivised to sell as they see other asset prices tanking over a period of days rather than months or years.
When might the low-point in prices come? It will vary from region to region but on average for the country I expect it before the middle of next year. That is, it might come at the end of this year or one year from now.
It wouldn't matter if I were looking to buy my first house. This is the environment I would have been hoping for in the past two years – lots of other people not wanting to buy houses and a rapidly rising number of property listings, so far ahead over 80% from the low last year. Prices are falling and vendors are increasingly willing to negotiate and accept contract conditions.
I would be actively looking rather than joining the frightened herd more fearful of paying 10% too much for the property they plan holding for 10-20 years than of acquiring a home in which to raise a family. Perspective on one’s life goals can easily gets chucked out the window when asset prices are falling and FOOP (fear of over-paying) takes over just as FOMO did on the way up. Control your emotions, step away from the herd, and you can get on with your life.
Truth be told, for many young buyers this is a catch-22 situation. Just as they face high listings, lower prices, and increasingly compliant vendors, many cannot get a mortgage because higher test interest rates and uncommitted monthly income requirements mean they cannot qualify for the amount they want – even as that amount declines.
So, who are the main winners from this accelerated environment of house price declines and interest rate rises? Cashed up buyers - which invariably means investors, not first home buyers. Who are the losers? Under-capitalised property developers first of all, followed by some builders as orders for new builds are about to fall away firmly.
