ANALYSIS: What would have happened with house prices if the pandemic had not happened?
Over the period from 2011 to 2019 the rate of inflation in New Zealand had averaged just 1.2%. This was too low for the Reserve Bank to tolerate and after cutting the official cash rate by 1.75% over 2015-16 it cut the rate another 0.75% between May and August of 2019.
Following that change, I noted that the pace of house price inflation in New Zealand had been boosted and that Auckland in particular had been placed on a new upward leg of its house price cycle.
On average during 2018 and up to the September quarter of 2019 house prices in Auckland had fallen by 0.3% every three months. In the rest of the country, prices rose on average by 1.7% each quarter. But in the December quarter of 2019 Auckland prices rose by 2.7% and the rest of the country saw a gain of 4.1%.
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Then in the March quarter, before lockdown and before the official cash rate was cut to 0.25% and LVRs removed, Auckland prices on average rose by another 3.5% while they rose 3.1% elsewhere.
Given this momentum, it seems reasonable to expect that prices inside and outside of Auckland on average would have risen by at least 12% in both 2020 and 2021 – probably more. Between March quarter 2020 and the December quarter last year average house prices in Auckland actually rose by 39% while rising 44% elsewhere.
Therefore, we can take a wild guess and say that at the peak of the pandemic boom late last year prices in and outside of Auckland were roughly 20% above where they would otherwise have been without Covid-19. But what about the investor tax rule changes of March 2021, which haven’t motivated investors to sell but have strongly dampened their buying? They probably would not have happened quite so quickly, but probably they would eventually have been introduced.
Would the 0.75% cut to the official cash rate in 2019 have been reversed over 2021 with house prices rising near 12% per annum? No. The annual rate of inflation up until March quarter of 2021 was still only 1.5%, and the jump to 5.9% at the end of 2021 largely reflected Covid-induced supply chain and shipping problems.
The pace of wages growth come the end of 2021 was still just 4.2% by the measure I use. This was barely changed from 3.8% pre-Covid and not suggestive of all that much impact as yet from labour shortages.
Without Covid, the Reserve Bank would probably be tightening monetary policy now rather than last year.
Tony Alexander: “The period of falling NZ house prices will probably be over before this time next year.” Photo / Fiona Goodall
All of which adds up to what? Late last year, at the house price cycle peak, average prices were about 20% above trend. They have so far retreated about 2% on average and if they fall another 10%, they will be almost on their long-term trend once more.
Asset price over-valuations can actually disappear quite quickly when the underlying trend is upward and the view I’m running with is that the period of falling NZ house prices will probably be over before this time next year. After that a period of flatness is likely. For how long? That is impossible to say given the large and highly uncertain factors in play.
All I can do is consider how my view would influence my behaviour if I were in the market for a house. Would I stop looking? Only if I feared for my job, in which case I’d be booking a seat to Australia for work. Otherwise, I would keep looking but stick very strictly to the list of desired property attributes I would have drawn up when starting my search perhaps one to two years ago. If I found properties with almost all the things I want, I’d make some low offers and see what might happen.
After all, we are in a solid buyer’s market, there is a flood of attached dwellings hitting the market in Auckland, net migration outflows are set to worsen, and depressed sentiment is going to keep a lot of other buyers from competing against me.
Basically, I’d be walking with purpose but not panic against the tide of scared buyers going the other way.
- Tony Alexander is an economics commentator and former chief economist for BNZ. Additional commentary from him can be found at www.tonyalexander.nz
