ANALYSIS:

The year 2023 has arrived, and after a brief intermission during which it briefly rained, we resume our game of predicting the direction that housing values will take. By this point, I would like to think that everyone, with the possible exception of the most misguided, is aware that none of us has the capacity to precisely predict the amount that house prices will move up or down over a cycle, and that we only know when the tops and bottoms are after they have occurred.

In the early stages of the pandemic, everyone predicted that home prices would drop significantly. Instead, they increased by 46% in New Zealand after reducing just 3% between April and May 2020. Since the November 2022 peak of prices at silly levels driven by rampant FOMO, we have seen falls recorded on average nationwide of 13.7%.

Prices now sit 22% above where they were when we went into the first lockdown. Over that almost three-year period of time average private sector hourly earnings have risen by about 16%. So, the ratio of average house prices to incomes by this particular measure is now just 4% above early-2020 levels after being 30% above late in 2021. 

In the same way that people overestimated how high prices would rise in 2021 and 2022, there is now a possibility that people may become overly gloomy about how much prices will decline. Until we factor in mortgage rates, affordability will soon be better than pre-pandemic as incomes rise to match lowering housing prices. They are currently higher than average.

The common one-year fixed mortgage rate in early 2020 was around 3.4%. It is currently close to 6.4%, which is higher than the 5.3% average for the ten years ending in 2018. For two reasons, that average is a stronger indicator of "normal" than any computation that includes the years 2019–21.

The Reserve Bank dropped its official cash rate to a record low of 1% in 2019 due to concerns about deflation, and everyone was talking about negative bank deposit rates. Second, in 2020 and 2021, concerns about a pandemic-induced depression led our central bank to further relax monetary policy and maintain it for an excessively long period of time.

Nevertheless, leaving average comparisons aside, consumers are more concerned about where mortgage rates may go than where they are right now. Because of their worry, some people, primarily investors, are planning to rationalise their holdings and become weak sellers in a declining market. This is a dreadful situation to be in, as evidenced by the fact that many people who wish to sell do not do so unless their negative cash flows are so severe that they have no other option.

The number of listings in the country as of the end of December was 28,900, a 54% increase from the end of 2021 and the highest level since late 2015. However, seasonally adjusted new listings decreased by roughly 5% in December and were 27% lower than in December 2021. There is no mad dash to sell real estate, and the dominant market dynamic continues to be a dearth of buyers.

You must therefore consider when the buyers return if you're trying to predict when home values will cease declining. Stronger than anticipated nett migration inflows, excellent job stability, and quickly rising affordability in terms of property prices compared to income will all be helpful. However, interest rates are crucial. You'll need to predict when they'll start to fall.

Tony Alexander said "The peaks for fixed rates of two years and beyond while floating rates are set to rise up to another 1.25% and the one-year rate could creep higher by 0.25% or so. But with most people fixing just one year and the Reserve Bank clearly needing to see inflation solidly trending down, it doesn’t seem reasonable to believe yet that people will be thinking in terms of buying then riding a coming trail of falling interest rates downward until the middle of the year at the earliest."

However, given that the interest rate cycle is currently data-driven, keep an eye out for the next NZ inflation report, which will be released on January 25.

Tony Alexander is an independent economics commentator. Additional commentary from him can be found at www.tonyalexander.nz