Tony Alexander: Six reasons why the housing market won’t collapse in 2023

ANALYSIS: Think back to what happened with house prices in 2021. They started the year with a hiss and a roar and gains averaging 3% a month in the March quarter. Then average rises slowed to 0.8% a month in the June quarter as people ruminated over the potential impact of new tax rules for investors and the return of LVRs.

But then, in the five month period from July to November, they rose by 2.2% a month on average despite net migration outflows, rising mortgage rates from June, and banks tightening lending rules. This last gasp surge in prices driven by a fall in listings to a record low of only 13,400 in July 2021 came to a grinding halt in the last two months of the year when two things happened.

First, from November banks were restricted to a maximum 10% of new loans involving less than a 20% deposit as opposed to 20%. Then, from the start of December changes to the Credit Contracts and Consumer Finance Act came into force and banks became fearful of breaching rules aimed at loan sharks but rather sillily applied to them by the Government as well.

These two straws broke the camel’s back of the ridiculously soaring housing market and now prices have retreated on average 13.7%, annual sales have fallen 29%, and a long overdue “correction” is belatedly starting in the house building sector. My sympathies to those who are going to get caught out in the construction downturn.

Why this recap? Because for the second year in a row two new things have happened and we need to ask ourselves whether they also are camel back-breaking events. The first was the higher than expected inflation number on October 18, which led to a round of near 0.5% increases in fixed mortgage rates. The second was the November 23 monetary policy tightening and scary recession words which caused another near 0.5% round of fixed rate rises and has shocked consumers into their shells.

Will prices fall another 13.7%?

No, principally because things are far less out of whack than back then. First, late in 2020 the ratio of house prices to incomes nationwide was 30% above levels immediately prepandemic. Now that ratio is only 4% above pre-pandemic levels courtesy of the house price falls already mentioned and strong wages growth such as the average 8.6% gain in the past year.

Second, in late-2021 net migration was -14,000 and worsening. Now the flow is -4,000 and getting better at a very rapid pace.

Third, back then monetary policy had only just been tightened. Now, we are less than four months away from the official cash rate peaking and given that bank funding costs for fixed rate lending already reflect an expectation of the cash rate hitting near 5.5%, extra upward pressure on those fixed rates has almost completely gone. We are probably at the peak of the fixed rate cycle and that is relevant for those looking to buy. Rolling off 2.5% onto 6.5% is relevant for those who have already bought a property and they are a completely different group of people.

Fourth, back then the stock of listings was rising and hit 19,000 at the start of December before reaching 28,400 in August this year. Now the stock is 26,500 and falling.

Fifth, banks are bit by bit easing their lending criteria as they learn to live with the CCCFA and falling real estate sales newly threatening lending and therefore profit targets will soon encourage some rate discounting to try and drum up new business.

Sixth, potential buyers have become scared of committing to new-builds because of the growing list of building business failures and the highlighting by media of lifetime savings lost by purchasers left out in the cold. Buyers are turning back to perusing the stock of existing properties.

There are other factors of lesser impact in the coming year such as the probable change in government bringing some investors back into the market. But these main ones already mentioned tell us that while prices are going to head lower still into winter 2023, the worst of the decline is behind us.

Then again, none of us picked soaring prices from June 2020, and none of us predicted prices falling 13.7% this past year. So, remember your bag of salt when reading “predictions” from analysts like myself regarding where prices are headed. They’re just guesses we hope to update quickly before they look silly.

Top 10 locations where it’s become easier to enter the market

The property market is looking a lot more encouraging for first home buyers today than it did this time last year.

That’s because prices fell sharply during 2022, reducing the size of the deposit first home buyers need to enter the market.

Between January and November 2022, the price of the average property fell 10.2%, to $945,568, according to valuation firm QV.

In even better news, the price of the cheapest 25% homes in New Zealand – the kind first home buyers are most likely to buy – fell by an even greater amount (by 11.7%).

Focusing just on that cheapest 25%, these are the 10 locations where prices fell the most (in percentage terms) between January and November, and their new average prices:

• Upper Hutt down 23.5% to $544,200

• Hutt City down 23.3% to $547,300

• Porirua down 19.1% to $591,000

• Auckland City down 18.8% to $500,800

• Wellington City down 18.8% to $568,600

• Papakura down 16.7% to $712,600

• Dunedin down 15.9% to $408,200

• North Shore down 15.9% to $843,500

• Palmerston North down 15.0% to $456,300

• Hastings down 13.9% to $467,800

QV spokesperson Simon Petersen said prices came back a long way in 2022, after increasing by almost 30% in 2021.

“The upside of the current downturn is that, in the years ahead, prospective first-home buyers who have been locked out of the property market for so long should eventually have better opportunities to climb on that property ladder, without having to head across the ditch to accomplish their home ownership dream,” he said.

Why expert advice is more important than ever

That said, Mr Petersen did point out one challenge first home buyers will face this year.

The Reserve Bank of New Zealand made a series of official cash rate increases in 2022, and is likely to make more in 2023, he said.

“That’s not good news for home buyers or homeowners, because getting finance to buy property and then servicing a mortgage will become that much more difficult,” he said.

That’s why it’s a good idea for first home buyers to work with an expert mortgage adviser.

We can compare home loans on your behalf, to find a competitive interest rate. Also, we can let you know which lenders would be more likely to approve your application and your preferred loan amount.