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Reserve Bank predicting house price fall of 14% as market turns rapidly

In its Monetary Policy Statement outlining a 50 basis points Office Cash Rate increase to 2%, the RBNZ says it expects a total fall of 14% in house prices by early 2024.

Thursday, May 26th 2022, 10:13AM 1 Comment

by Sally Lindsay

While this seems like a relatively large decline compared to New Zealand’s history, it will bring prices back to only April 2021 levels. A 30% drop from the November peak of house prices will be needed to bring them back to pre-Covid levels.

That said, the size and speed of the fall in house prices are highly uncertain, says the RBNZ.

Market turns rapidly

One Queenstown agent says the market has already had a rapid decline.

Queenstown’s Tall Poppy owner Ron Blunden says despite the huge price increases over the past two years and hundreds of willing buyers, the market has done a complete about face in a matter of two to three weeks and is quiet.

“Six weeks ago we were still dealing with multi-offers on properties. Two weeks later we had a house for sale at Arthur’s Point with a reasonable price and received no inquiry. The vendors dropped the price by $100,000 and there has still been no inquiry.”

He believes Queenstown’s housing market will be quiet through the winter as people take a breather, especially investors.

While listings are increasing, inquiries from buyers are not. The average house price is $1.4 million and there is not much for under $1 million, so when a home and income property for under $500,000 - a price not often seen in Queenstown - hit the market Blunden expected it to fly out the door - it hasn’t.

“Last year it would have sold it in a matter of days to an investor, developer or DIYer. It would have attracted four to six buyers, half of them investors who would have probably upgraded and managed the property themselves. “It shows how fast the market has turned.”

In Auckland real estate agents are reporting that big residential sections that were selling for millions last year are now one of the hardest types of properties to sell. Demand for residential development properties has dried up as developers, land bankers and investors cannot get funding.

The RBNZ says the housing market is cooling. House prices have fallen by about 5% since their peak in November 2021, towards more sustainable levels. Many factors have contributed to the downward pressure on house prices and sales, including, higher mortgage rates, tightened lending, the removal of interest deductibility for investors, tighter loan-to-value ratio (LVR) requirements, lower net immigration growth, increased housing supply, with a recent record number of building consents.

The bank says despite recent declines, house prices remain above levels that are justified based on their economic fundamentals.

Day of reckoning

Thousands of borrowers will come up against much higher interest rates when their mortgages roll off fixed interest rates over the next year.

About $160 billion in fixed rate housing loans come up for review in the next 12months.

Many borrowers will be forced to pay much higher interest rates, some from 2.5% to 5% and face economic stress. Even further pressure will go on the mortgage market after yesterday’s OCR hike.

Independent economist Tony Alexander believes interest rates will go higher quicker. He is picking the OCR will peak at 3.5% , floating interest rates at 7%, while the one year fixed rates will rise 1-1.5% and house prices will fall 10-15% on average.

Rising interest rates help cool market

Mortgage rates have increased rapidly in the past 12 months, with fixed mortgage rates at the one- and two-year horizon increasing by more than 225 basis points.

This has reduced demand from prospective buyers, especially in the context of high house prices.

As a result, house sales have dropped, causing the stock of homes on the market to rise as some homeowners continue to list their properties for sale. Gradually, says the bank, sellers will adjust their price expectations lower to find buyers, or withdraw their listings.

However people who first borrowed during 2021 will find it more difficult to service their debts.

The RBNZ’s projection for the OCR implies that one- and two-year fixed mortgage rates will reach about 6% in the next year.

“If mortgage rates rise as forecast, there is a risk that a noticeable number of households that borrowed for the first time in 2021 will find it difficult to pay their mortgages and cover all their other usual expenses, says the central bank.

This is because a 6% mortgage rate is close to the level at which borrowers were tested during the COVID-19 period. There is a risk that these borrowers will need to cut back spending by more than currently assumed to meet their higher debt-servicing costs.

Higher interest rates, says the bank, will reduce the disposable incomes of a large majority of mortgage holders, lowering household spending.

Lower house prices will also weigh on consumption via the ‘wealth effect’. Typically people spend more as house prices rise, and less as they fall. Spending on long-lasting goods – such as whiteware appliances and furniture – will be particularly affected by a slowing housing market. Spending on these types of goods has been strong throughout most of the Covid-19 pandemic.

Household credit growth easing

Growth in new mortgage borrowing has slowed in recent months, after rising in 2020 and 2021.

Home buyers are finding it increasingly difficult to borrow at higher debt-to-income ratios due to banks’ stricter lending rules.

A greater scrutiny of expenses after changes to the CCCFA late last year also made it more difficult for some individuals to get credit, and loan approvals have taken longer.

As existing mortgages have begun to be repriced, the average interest rate on all mortgage debt has risen by 31 basis points since its trough to 3.14 percent. Just over half of all existing fixed mortgages are

Falling house prices will slow home building

The number of dwelling consents issued in the past year has been very high, and is continuing to grow as of March.

However, builders are facing challenges often associated with construction booms. Strong demand has exceeded supply capacity for materials and closed borders have made labour shortages worse. The price of building a new house has been the largest contributor to non-tradable inflation in the past 12 months.

The combination of high construction costs, higher interest rates and house price declines will make it more difficult for housing developers to achieve their required return on investment.

Developers will also find it increasingly difficult to secure pre-sales on new projects. As a result, the RBNZ expects the flow of new consents will begin to slow. Much of the strength in recent consent data is likely a lagged effect of housing market strength in the second half of 2021, as consents have been taking longer than usual to process.

Easing cost pressures

Lower demand for new residential construction should somewhat ease cost pressures on building materials, while the supply of building materials should gradually improve.

The RBNZ assumes this will allow builders to work through their backlog of projects over the next year or two. Some construction firms and developers will experience more challenging financial conditions, as already seen.

Still, the sector as a whole is expected to continue to operate near capacity. If the supply of building materials increases as anticipated, this should increase the number of completed dwellings.

There is a risk interest rate increases and house price falls will lead to a large drop in construction-sector activity. In such a scenario, the RBNZ expects to see more developer insolvencies and a large number of incomplete or cancelled projects. This will result in a steep decline in residential investment and present downside risks to our medium-term outlook.

However, New Zealand’s financial system is in a much stronger starting position than during the last major downturn in the construction sector following the global financial crisis in 2008. Therefore, the availability of credit should support construction sector activity, albeit at a higher interest rate.

Tags: house prices

« ASB expects an inflation adjusted 20% drop in house pricesPrice retreat as sales escalate »

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Comments from our readers

On 25 May 2022 at 11:15 pm Janice Powell said:
So if you don't pay as much for the house with house prices dropping - you pay more now in mortgage, with interest rates rising, so no-ones getting a 'bargain'.

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Lender Flt 1yr 2yr 3yr
AIA 5.95 4.85 5.35 5.65
ANZ 5.94 5.95 6.40 6.59
ANZ Blueprint to Build - - - -
ANZ Special - 5.35 5.80 5.99
ASB Bank 5.85 5.35 5.80 5.99
Avanti Finance 5.95 - - -
Basecorp Finance 6.95 - - -
Bluestone 5.89 7.49 8.09 8.19
BNZ - Classic - 5.35 5.69 5.99
BNZ - Mortgage One 5.94 - - -
BNZ - Rapid Repay 5.94 - - -
Lender Flt 1yr 2yr 3yr
BNZ - Std, FlyBuys 5.94 5.95 6.29 6.59
BNZ - TotalMoney 5.94 - - -
CFML Loans 6.45 - - -
China Construction Bank 5.50 5.40 6.14 6.40
China Construction Bank Special - 4.45 5.19 5.45
Co-operative Bank - First Home Special - 4.75 - -
Co-operative Bank - Owner Occ 5.85 4.85 5.35 5.65
Co-operative Bank - Standard 5.85 5.35 5.85 6.15
Credit Union Auckland 5.95 - - -
First Credit Union Special 5.85 ▲5.35 ▲5.85 -
Heartland Bank - Online 4.10 ▲4.90 ▲5.29 ▲5.59
Lender Flt 1yr 2yr 3yr
Heretaunga Building Society 6.10 ▲5.35 ▲5.80 -
HSBC Premier 5.89 4.39 5.15 5.39
HSBC Premier LVR > 80% - - - -
HSBC Special - - - -
ICBC 5.25 4.39 5.09 5.45
Kainga Ora 5.43 4.57 5.58 5.85
Kainga Ora - First Home Buyer Special - - - -
Kiwibank 5.50 ▲6.19 ▲6.69 ▲6.79
Kiwibank - Offset 5.50 - - -
Kiwibank Special 5.00 ▲5.19 ▲5.69 ▲5.89
Liberty 4.84 - - -
Lender Flt 1yr 2yr 3yr
Nelson Building Society 6.45 5.55 6.15 -
Pepper Money 4.49 - - -
Resimac 6.19 5.60 6.16 6.29
SBS Bank 5.79 ▲5.65 ▲6.09 ▲6.19
SBS Bank Special - ▲5.15 ▲5.59 ▲5.69
Select Home Loans 4.09 4.29 4.86 5.09
TSB Bank ▲6.30 ▲5.65 5.79 ▲6.45
TSB Special ▲5.50 ▲4.85 4.99 ▲5.65
Unity 5.65 4.95 5.55 -
Wairarapa Building Society 5.74 4.95 5.75 -
Westpac 5.94 5.95 6.29 6.59
Lender Flt 1yr 2yr 3yr
Westpac - Offset 5.94 - - -
Westpac Special - 5.35 5.69 5.99
Median 5.87 5.35 5.77 5.99

Last updated: 1 July 2022 9:33am

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