New Zealand banks forecast major house price plunge

Westpac’s latest “Home Truths” report forecast a 10% decline in New Zealand house prices this year, followed by a further 5% fall in 2023:

We previously expected a 10% peak-to-trough fall in prices over this year and the next; we now expect a total drop of 15%. We’ve also front-loaded the fall, with a 10% drop in 2022 and a further 5% in 2023…

We should note that our forecast is based on the CoreLogic house price index, which is a quarterly average. A higher-frequency measure like the REINZ monthly house price index will see a larger peak-to-trough decline than this.

Given New Zealand’s inflation is running at nearly 6% annually, Westpac’s forecast implies a peak-to-trough decline in real house prices of around 25%.

Over the weekend, another Big Four bank – ASB – forecast that New Zealand house prices could plunge 20% from their peak in real inflation adjusted terms, which would represent the biggest price fall since the 1970s:

ASB’s economists said “three big housing nasties” it had highlighted last year as potential risks to the housing market had arrived all at once – tighter credit conditions, higher mortgage rates and increased supply of new housing.

They said the bulk of the impact of rising mortgages was yet to be felt because it took about six months to filter through to prices.

About 60% of mortgages are due to be reset in the next 12 months, including those on floating rates. Almost all would go on to significantly higher rates…

“The sheer speed with which mortgage rates have risen – amongst the fastest pace on record – will pose big headwinds for house prices over the second half of this year,” they said…

In total, they expected a 12% peak-to-trough decline… But when adjusted for inflation, it was about a 20% correction, the biggest drop since the 1970s.

ASB’s forecast looks optimistic given New Zealand house prices have already fallen around 5% since November and mortgage rates have only recently started to lift.

New Zealand’s cash rate is currently 1.5%, and is still tipped to rise by between 1.5% (Westpac’s forecast) and 2.6% (Market’s forecast):

RBNZ official cash rate

Based on these facts alone, it seems hard to believe that house prices nationally would only fall another 7%.

Ultimately, the aggressiveness of the RBNZ’s monetary tightening will determine whether New Zealand’s housing market experiences a correction or a full blown price crash. Grab the popcorn.

Unconventional Economist

Comments

    • RBNZ Governor Adrian Orr got is wrong on several fronts over the last couple of years. That’s ok. It happens in any situation where a choice between two things has to be made at times of unforeseen events – it’s a matter of luck you go the right way.
      But a demonstration of Leadership is setting about correcting your mistakes when they eventuate. And Orr looks like he is. The senior advisors, who no doubt had a lot of input into his erroneous decision-making, are now gone from the RBNZ – another show of leadership.
      And let’s remember that it is the Australian banks that are making a call on the economy that their subsidiaries are operating in. Perhaps it’s a dress rehearsal for what’s to come back home?

  1. Hugh PavletichMEMBER

    … Essential reading …

    IMF says New Zealand house prices have increased by almost four times the average increase across OECD countries since 1998 … David Hargreaves … Interest Co NZ

    https://www.interest.co.nz/public-policy/115822/imf-says-new-zealand-house-prices-have-increased-almost-four-times-average

    Macroeconomic policy support may be needed if there is a deep and rapid correction in the New Zealand housing market, the International Monetary Fund says.

    In its latest review of the New Zealand economy, the IMF has had a close and detailed look at the housing market here.

    It says that financial stability risks from a sharp downturn in the housing market are limited given high bank capitalisation, “but pockets of vulnerability, particularly amongst recent borrowers, may exist”.

    “More broadly, there is likely to be a larger impact on consumption through wealth and sentiment effects. In a scenario of a marked housing correction, macroeconomic policy support may be needed to avoid second round effects and a pronounced downturn.”

    The IMF notes that price increases in New Zealand have been higher than in other advanced economies, particularly in the post-Covid-19 period. … read more via hyperlink above …

    .
    .
    Median Multiples | interest.co.nz

    https://www.interest.co.nz/property/house-price-income-multiples#:~:text=Based%20on%20this%20official%20work,on%20the%20US%20housing%20market.

    United States Median Multiples

    https://www.newgeography.com/content/007260-demographia-united-states-housing-affordability-188-markets-rated

    http://www.demographia.com/db-dhi-index.htm

  2. Hugh PavletichMEMBER

    The New Zealand housing market is much like the Sri Lankan used car market … severely strangled …

    … A recent perspective from a Sri Lankan New Zealand journalist …

    Wealth inequality debate is really an argument over land … Dileepa Fonseka OPINION … Stuff New Zealand

    https://www.stuff.co.nz/business/128519952/wealth-inequality-debate-is-really-an-argument-over-land

    OPINION: Irish economist David McWilliams quipped recently that “it’s very, very easy to burn the house down, if you don’t own a house”.

    If you want to know why wealth inequality is back on the agenda, in a way that it wasn’t even during the financial crisis, you just have to look at the way the housing and land markets have been run.

    Housing has been run much like the secondhand car market in Sri Lanka.

    That country is currently going through the worst economic crisis in its history, foreign reserves have dried up, industries like tourism have been cut off at the knees, electricity is available only for one hour a day in some instances, and people are having to line up for hours to access food, water and milk powder.

    But despite the cut in incomes, second-hand cars are more valuable in US dollar terms than before the crisis.

    Agence France-Presse (AFP) reported the going rate for a 2017 Toyota Land Cruiser recently hit US$312,500 – nearly half a million New Zealand dollars – despite declining incomes.

    The reason? Alongside other longstanding restrictions and duties, the Government put a two-year ban on the importation of cars, slowing down the pipeline of new cars coming on to the market. … read more via hyperlink above …

    … What are New Zealanders learning about the consequences of poor quality and reckless governance ? …

    World watching NZ housing market as Auckland labelled ‘canary in coal mine’ … Geraden Cann … Stuff New Zealand

    https://www.stuff.co.nz/business/128396590/world-watching-nz-housing-market-as-auckland-labelled-canary-in-coal-mine

  3. Hugh PavletichMEMBER

    ‘Brain drain is under way’: Workforce shrinks as young people leave … Susan Edmunds … Stuff NZ

    https://www.stuff.co.nz/business/300589751/brain-drain-is-under-way-workforce-shrinks-as-young-people-leave

    Killing of quarter-acre dream only benefits council coffers … Steve Stannard … Stuff NZ

    https://www.stuff.co.nz/life-style/homed/300589094/killing-of-quarteracre-dream-only-benefits-council-coffers

    The days of centralization and medium / high density living are well and truly over … for starters … check out this Manhattan office working example … and too New Zealand …

    … Large de – centralized and affordable suburban, exurban and smaller urban areas living and working arrangements are the future …

    … The days of bubble pricing for real estate are over …

    Only 8% Of Manhattan Office Employees Are Back In The Workplace Full-Time: Study … Zerohedge

    https://www.zerohedge.com/personal-finance/only-8-manhattan-office-employees-are-back-workplace-full-time-study

    (New Zealand) ‘20% occupied:’ Huge drop in use of office space nationwide … Miriam Bell … Stuff New Zealand

    https://www.stuff.co.nz/business/property/128545446/20-occupied-huge-drop-in-use-of-office-space-nationwide

  4. Leroy Huggins

    This one is so easily solved. Structure our universities so that any Australian student (citizen or PR) receives a 50% cut to their HECS/HELP debt in return for contributing X hours of farm labour, and a 100% cut for contributing 2X hours. How much labour would such a policy unlock? Course work & exam timings at local universities could be structured around growing seasons.

    Students also receive the appropriate wage direct from he farmer for their work, and that income could be made tax free and removed from Austudy income deeming if further incentives were required. My friends and I spent a season in Shepparton picking fruit, and had a ball. We would definitely have committed to more work if such a system had been in place.

  5. Hugh PavletichMEMBER

    Economy ‘red lining’: Another bank predicts biggest house price fall since 1970s … Susan Edmunds … Stuff NZ

    https://www.stuff.co.nz/business/128661766/economy-red-lining-another-bank-predicts-biggest-house-price-fall-since-1970s

    An Outside In View Of New Zealand Housing … Martin North … Digital Finance Analytics / Youtube

    https://www.youtube.com/watch?v=gdYsICOjQe0

    https://digitalfinanceanalytics.com/blog/an-outside-in-view-of-new-zealand-housing/