ANALYSIS: What will you think when the following headline appears before the end of the year? “Reserve Bank says house prices are now sustainable” Why will this headline come? Because two months’ ago the Reserve Bank’s Chief Economist said that once average house prices retreat 15% from their late-2021 peak they will no longer be considered unsustainable.
So far prices have declined 9.5% so there is another 5.5% to go. Prices have fallen on average 1.8% a month in the past three months, so the 15% decline may be achieved when September’s house price figures are released, but let’s be conservative and say the 15% fall comes the following month.
The headline will coincide with a few other things likely to be going on. First, inflation is probably going to be falling from the current rate of 7.3% when the next numbers appear mid-October. We can see international shipping charges creeping lower, oil prices are falling, global food prices are declining, and rent increases in NZ are slowing.
Falling inflation is likely to reinforce views that mortgage rates are falling. Already the cost to NZ banks of borrowing money in the wholesale markets to lend to you and I at fixed mortgage rates has fallen about 0.7%. The two-year fixed rates have already declined, and history tells us that at some point the bankers will baulk at their generous cashback offers and strip them back to compete once again with discounted interest rates.
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Second, bank depositors are likely soon to use this phrase. “Is this as good as it gets?” They will be referring to the 1-2 year main bank term deposit rates topping out at just over 4%. As despair grows about good returns, people will start casting their eyes back towards property and other assets.
Third, once average house prices have fallen 15% the Reserve Bank is likely to ease up its stringent LVR rules. That will bring first home buyers back into the market.
Fourth, the stock of property listings is now 104% ahead of a year ago, near 28,000. Buyers might think that is great at the moment as they are not doing much searching. But at some point, people will realise that this total (which will rise a bit further) is still 21% below the ten-year average listings stock and 38% below the level of ten years earlier. Listings are not really as plentiful as people think.
Independent economist Tony Alexander: “Once average house prices have fallen 15% the Reserve Bank is likely to ease up its stringent LVR rules.” Photo / Fiona Goodall
It was the record shortage of listings late last year which contributed to a FOMO-driven extra 11% surge in house prices from July – November 2021 despite rising interest rates and tightening credit availability.
Fifth, construction costs continue to rise and when you offset a 20% increase in building costs against a 15% fall in prices for existing houses, the incentive to switch back to used properties may soar.
Sixth, there is a risk that the political opinion polls show National once again gaining, as long as they stop shooting themselves in the foot. If that happens, we are likely to see investors moving back into the housing market given National’s promise to restore interest expense deductibility and take the brightline test back to two years.
Seventh, at some point attention will shift from potential global recession and dismal confidence readings to some important fundamentals supportive of growth in our economy, population, and incomes. Namely, the NZD is below average and helping exporters, and the determination of foreign tourists to travel in the northern hemisphere summer suggests flows back here will surprise on the strong side within a few months.
The Government’s deficit is running $5bn less than Treasury expected so scope for a pre-election splurge and economic surge is high.
Our export prices are 25% ahead of late-2019 levels, feelings of job security and ability to service a mortgage are high due to the very tight labour market, and there is a large backlog of construction work to do in the coming decade. In that regard the soon to plummet monthly dwelling consent numbers will be a red herring.
These things will not stop house prices falling further this year. But they will probably eventually contribute to the cycle turning once more and have capacity to push prices up 5% - 10% on average next year.
- Tony Alexander is an independent economics commentator. Additional commentary from him can be found at www.tonyalexander.nz
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