Registered Valuer, Gordon Edginton contemplates what we can expect from the housing market for this year, after an eventful 12 months.
The housing correction seen throughout 2022 is expected to remain in play this year. Low sales volumes and further falling prices are almost a given as the slowdown is firmly entrenched across New Zealand.
Buyer behaviour has changed in response to the slowdown. There has been a shift to a âbuyerâs marketâ as supply of new and second-hand housing outstrips demand. Listings have risen considerably but there isnât much evidence of sellers getting desperate. The rise in inventory for sale is more a function of fewer buying rather than a flood of sellers trying to exit. Houses are simply staying on the market for longer than was seen in the red-hot boom of 2021. Average days to sell now sits at 53 across NZ, well above the historical average of 39, and is still trending up.
House prices fall as inflation remains high
The REINZ House Price Index shows a 17% decline in Auckland over the past 12 months and a 21.4% decline since the peak in November 2021. Nationwide there is a 14% drop in the HPI over the past 12 months and 16.2% drop since the peak. There is probably more downside risk to greater price falls as mortgage interest rates are anticipated to rise further in response to the Reserve Bank (RB) raising the OCR in coming months.
One could argue this decline has been relatively subdued given prices lifted more than 45% during 2020 and 2021, following the extreme and extended policy stimulus that was put in place by the RB and Government to get the economy through the worst of the pandemic. As we now know, this protracted stimulus has caused the surging inflationary pressures we are now grappling with, and this, coupled with strong demand plus supply and logistics problems, has pushed inflation to a 32 year high of 7.2%.
Households are being squeezed by the high inflation eroding spending power and this will be more intense as interest rates continue to rise. With many borrowers due to roll off low fixed mortgage rates this year they will see a big increase in monthly interest payments, which will take a large chunk out of many householdsâ disposable incomes. House prices will continue to fall as a result, spending will drop, and unemployment is expected to rise. A looming recession is forecast for this year and in fact is being engineered by the RB to curb these inflationary pressures.
As the higher interest rates dampen demand for housing and the OCR hikes finally peter out this year (assuming inflation starts to fall), the bottom of the market should be reached, and price declines stop. The interest rate outlook will therefore be a key factor affecting the property market, and that in turn is driven by inflation. Most commentators are picking the second half of 2023 will be when this trough is reached.
The housing market is at the front line of the inflation fight. It is too early to call a floor to the market or that the bottom is even close. Given that mortgage interest rates are yet to peak, further declines seem likely with prices perhaps bottoming out once the OCR hikes are over.
Floods add more uncertainty to the market
The recent flood and cyclone events felt in the North Island have added another layer of issues for households and the property market to grapple with and will require a long and costly recovery. There will be considerable ongoing disruption and the reconstruction is expected to take many years. This may add further inflationary pressures to an already stretched construction industry.
There is considerable uncertainty around what impact the flood events may have had on the market in general and individual properties that might have actually been flooded.
In Auckland the market is particularly slow and the recent flood events have impacted on open homes and auctions. These flood events could deter buyers further and make them even more cautious in entering into a contract – particularly a property that may have been affected by the floods – but it is too early to quantify any change in asset values.
Lending environment remains tough
The other key issue impacting the market is the tight credit environment. Banks have been quite prudent in their lending practices since the GFC and this, coupled with restrictive Loan to Value Ratios (LVRs) and CCCFA rules, have made lending difficult. This tough lending environment is unlikely to ease over the coming months, as the economy contracts, but should mean banks are not exposed to many non-performing loans and thus distressed sales should hopefully not be a major factor this year.
The RB are unlikely to loosen LVR settings anytime soon and are looking to add debt to income restrictions to its rule book, which banks will need to comply with. This extra layer of compliance will make lending even more difficult and continue to dampen market sentiment.
Worldwide concerns
Adding to the uncertainty and negative outlook, the Russian invasion of Ukraine has pushed up energy and food prices around the world. Supply chains worldwide have been disrupted and problems exacerbated by Chinaâs poor vaccination outcome and failed pursuit of an eradication policy. This has resulted in rising prices for materials and goods. Worldwide share markets have fallen sharply on the back of these concerns and recessionary worries in many countries. Expectations for increases in global interest rates may flow through to still higher rates in NZ.
Some silver linings
However, it’s not all doom and gloom and there are some buffers to these headwinds. The labour market remains tight with low unemployment of 3.4% and rising wage growth. There is a high level of job security and fierce competition for trained and qualified staff. The tourism and hospitality sector are recovering strongly from the severe pandemic shock and there is growth in foreign students returning.
Net migration has turned upwards quickly and could improve a lot further as the Government is now reversing immigration settings to ease the labour shortages in key sectors. China has reversed its pandemic lockdown policy, and this will see a boost in both spending and production as a result which should improve some supply issues.
The New Zealand rural and agricultural business sector remains in strong shape. High prices for dairy and other primary products continue to support the rural market. And finally, the construction sector is also still in reasonable heart. Building Consents are coming off their high levels as house prices continue to drop, but there will be a lengthy tail to the construction boom as historical consents are completed. Supply issues and product shortages coupled with soaring building costs are adding further pain to the building sector.
Uncertain outlook
Both the New Zealand and worldwide economies have moved on from the initial setbacks caused by the pandemic. The economic stimulus put in place has resulted in high inflation. Most economists and the RB are predicting the NZ economy will fall into recession this year which does not bode well for the real estate and construction sectors. The median number of house sales is at its lowest level since 2011 and the GFC while the median price is down around 15% from the peak. The outlook is quite uncertain with more downside risk. As interest rate increases flow through the economy, demand and confidence will fall and households will wind back their spending. The impact of this on the property market is predicted to be a prolonged downturn this year.
If you need a valuation of your property then please feel free to contact us at [email protected], or click here for more information.