![house-price-fallrf1](/sites/default/files/2022-08/house-price-fallrf1.jpg)
ASB chief economist Nick Tuffley is styling the current housing market downturn as the biggest since the 1970s.
"A house as a unit of value is actually bleeding quite a bit of cash at the moment," Tuffley told an S&P Global Ratings 'Breakfast with the economists' virtual meeting on Tuesday.
House prices have dropped around 8% since peaking in November of last year and more is expected yet - as Tuffley noted..
"I think this downturn we are going through - it’s the biggest real house price downturn we’ve had since the 1970s.
"We sort of estimate somewhere around 20% [from peak to trough], give or take, in real terms, which is more than during the Global Financial Crisis downturn. So, it is quite sizeable when you look at it in that regard."
ANZ chief economist Sharon Zollner, who is forecasting an all-up fall of about 15%, said "in our forecasts, and I think most people’s forecasts, we are about half way through the fall in house prices".
"But the question I’ve got in my mind is how much of the absolutely necessary and inevitable real fall in house prices, how much of it is going to come through nominal house prices and how much is going to come through the general price level.
"You can imagine a scenario where if wage growth in particular holds up and the neutral OCR - the Official Cash Rate - creeps higher then you can imagine nominal house price falls petering out before that 15%.
"So, while there is still downside risk, particularly if the unemployment rate rises, I wouldn’t say the risks for nominal house prices are one way.
"But I wouldn’t get too excited as a housing investor because I think anything you gain in nominal house prices you are still going to lose in real terms. It would just be the other side of the fraction doing the adjusting."
The Reserve Bank has been busily pushing up interest rates via the Official Cash Rate, which it has now hiked in four consecutive 50 point jumps to 3.0%. More is expected with the OCR now widely anticipated to reach 4% by the end of this year and peak at maybe a little over 4% by the middle of next year.
But in the meantime the RBNZ has indicated that it is reviewing its view of what the "neutral" rate is - which it currently measures at 2%. The neutral rate is perceived as the level at which rates are neither restrictive, nor stimulatory for the economy. Just right in other words. The RBNZ is not expecting to finish its work on this before the end of this year.
The reason of course that the RBNZ has been hiking rates is to get inflation, which hit an annual 7.3% rate as at the June 2022 quarter, back under control and within the RBNZ's targeted level of 1% to 3%.
Zollner said if inflation doesn’t come down as quickly as people are expecting, the OCR is going to have to be kept up. (She has recently changed her call and is now forecasting the OCR will stay at 4% to the end of her forecasting horizon in 2024).
"It is not enough for inflation to turn. It has to drop fast," Zollner said during the S&P meeting.
"And I think that’s a risk that is under-appreciated by the markets. There’s a lot of uncertainty around how sticky and persistant inflation’s going to prove."
On the prospects for falling inflation, BNZ senior economist Craig Ebert said the headline inflation rates "could come down a lot".
"But again the trick is to understand the fundamentals and things like labour markets' capacity and we need to see those ease off to believe that the inflation decline is sustainable."
New Zealand's unemployment rate as per the June quarter was just 3.3%. And the extremely tight labour market is putting upward pressure on inflation. All the economists were viewing developments in the labour market as crucial.
Asked what the Reserve Bank viewed as a 'disinflationary' level for New Zealand's level of unemployment, Zollner said the RBNZ "doesn’t like to talk about that explicitly because it can be very easily passed by the media as the Reserve Bank wanting people to lose their jobs".
She said the Reserve Bank has no control over the level of unemployment that is inflationary versus disinflationary, they just have to estimate and work with it.
"Their latest estimate is about 4.5% and we are well below that at the moment at 3.3%. In both their May and August [Monetary Policy] Statements they forecast the unemployment rate to get to about 5% [by 2025] and I think that can be quite reasonably be estimated as their estimate of what is required - although you won’t find that in their policy summary."
Zollner said we actually need a period of "spare capacity" in the labour market in order to head off the potential for a wage price spiral - "which is absolutely live at the moment".
"The issue for the Reserve Bank is that the labour market lags the real economy, which of course lags what they do."
On the question of whether the RBNZ may yet need to 'do more' to quell inflation, Ebert said: "Well it is conceivable.
"There are still so many scenarios that could play out ahead. Everybody is sitting here at the moment thinking ‘well this inflation issue has come up on us, central banks are finally reacting. We will very soon properly get on top of it and we will all lick our wounds out the other side’.
"There are still a range of scenarios and that’s one of them. The other one is that central banks do just keep on plugging away and they do really slow things down a lot. Inflation comes down a lot and everybody’s thinking, well, gosh the market pricing for rate cuts next year is a valid one, which is the basis we are working off. But again there are scenarios where the core rates of inflation are sticky and that relates back to where the labour market goes."
In terms of relieving labour market pressures, Tuffley noted that the current Government was being cautious about letting migrant workers coming in.
“It’s almost a bit farcical where they are reluctant to give nurses instants residency to come to New Zealand, rather than making them wait two years when they get here out of fear they might disappear to Australia. Well, they’ll probably go to Australia first up if that’s where they want to go because it is much easier to get there.
“So we are putting a few roadblocks in the way in that immigration policy.
"It is probably the short term solution if we can get more people in to help alleviate some of those skill shortages."
Tuffley said work ASB economists had done recently studying the home grown labour supply looking out into the future had been quite sobering.
"The upshot is when you combine shifts in our demographics and potentially some pretty modest immigration - look our labour supply growth is potentially going to be very weak compared to what we have been used to.
"So, we actually probably have not just a near term challenge but potentially a challenge for quite a number of years where we are going to struggle to find people. We are competing in a global world for people. We are making it probably a bit tougher for ourselves than other countries in terms of attracting people here and our home grown labour force is going to be slow.
"So we are going to have to focus hard on how we adapt to that world as employers and organisations because we are going to have to look very hard at how we attract, retain people and do we really need to be stepping up our investment to try and boost productivity and find labour saving ways of doing business."
As a closing question the economists were asked how they viewed the economy, interest rates and inflation over the next 12 months.
Zollner said: "I’m seeing the risks very much skewed to the upside."
She said if inflation doesn’t come down quick enough "and maybe the neutral cash rate is creeping higher than the Reserve Bank is assuming" there could be "a slow realisation" that "maybe you just need to do a bit more and then a bit more. I think that’s quite a plausible scenario assuming nothing sudden comes along on the global front."
Ebert said: "None of the scenarios are particularly appealing."
He said the assumption is that the RBNZ will through raising the OCR slow the economy down and inflation pressure will come down.
"The difficulty is does that turn into something a bit nastier?
"And you can just run the risk where it all gets a bit ugly going forward.
"So soft landing is the best case scenario and that involves a lot of slow down and keeping things pretty cool. But again emphasis on keeping an eye on the supply side of the economy. What can we do to help the supply side of the economy. It might mean assisting businesses, compliance costs. Those sorts of things we chip away at. We talk about migration. What levers we could pull there to help get us through.
"But fundamentally it’s going to be bumpy, we just hope it doesn’t get particularly bumpy."
From an international perspective, S&P Global Ratings global chief economist Paul Gruenwald in New York said he thought central banks have a still "a relatively sanguine scenario" where they can raise rates a little bit above neutral and get inflation expectations "re-anchored at 2%" and bring wages and the labour force into "a golden sweet spot of not too much pain".
"I think the risks around that are to the downside…or to the upside on rates.
"It’s very plausible that central banks will need to do more. That spending will continue to be robust and maybe we have to be a little more aggressive on the rate cycle and cause a little bit more pain," Gruenwald said.
"I’m afraid on the risk side that is an increasing likelihood about where we could be going over the next 12 months."
74 Comments
Yeah, nah.
House prices in the major cities have corrected well beyond 8% so if we're half way down, 15% is patently wrong. The baseline data is not accurate.
Are we half way down? Really? Is inflation half tamed. Is Putin half way through his war waging? Is China halfway home to economic stability? Is the FED halfway through its tightening cycle? Is Europe already midway through their energy crisis? Is the climate half way through its crop destruction?
Calling BS on this. It's no more astute than watching my 13 year old pick a winner on sharesies.
The baseline data is not accurate
We can only assume the base is ATH. But your point is good. These people need to express themselves better and stop talking to the public like they're idiots. And they never, ever share their forecasting methodologies with us. Because they think the general public is too stupid to understand what they do.
I've locked horns with companies such as Nielsen and Kantar. I always ask them about their 'blackbox' stuff when they come out with their claims They can never tell me because it's 'proprietary.' Same old fluff as the bankers
Agreed. Headwinds building but only calling it as "it’s going to be bumpy" is underselling it. The high tide of endless cheap debt stupidity is now in full retreat. Much of specuvestor central is still in the denial phase. Made another offer at 2015 prices last week. Agent scoffed and failed to do their job (present the offer).
Ok then...make no commission. Happy to wait.
Interesting - in the last 3 weeks, after giving feedback verbally (also at fairly cheeky prices) on a couple of properties, I've been asked by the agents to put the offer in writing. Should I do it? Am I the useful idiot they want to use to "condition" the vendor, or do you think they're serious about tabling lowball offers?
Yes, I'm not trolling but giving feedback on the price I'd be happy with which, admittedly, is a bit ahead of the curve.
I'm a little bit fuzzy on the "They have to present written offers" bit. Could a vendor instruct the agent *not* to present offers under a certain figure?
In any case, I get the feeling that they want to present some lowball offers to use as ammunition to drive down expectations - rather than in anticipation of the offer actually being accepted.
I'm in a similar position. I work in a city but live in the provinces and am looking for a modest pied-a-terre. I have 3 or 4 that I am interested in. I have contacted the REA's and have been open and transparent about how I view the property landscape. I will buy, but currently the risk of catching a rapidly falling knife is simply too great. If the vendor wants to share that risk we can discuss a middle ground around what that looks like in terms of a value and a sale would then be possible. No bites but a nibble or two. I email each of the REA's monthly with the HPI data for the region to keep lines of communication open but trying to validate my truth at the expense of theirs.
I haven't visited any of the properties yet but if the vendors show some appetite I'll "reward" that gesture with an inspection with the further commitment to enter in to d/d work. I wait patiently but re-assured by a watchlist that has grown by 50% in the last month.
You're never going to buy at the bottom, it rarely happens. In theory you should not buy until the market turns, we have not had any sort of flush out yet and I reckon it's coming. I'd sit tight, if an agent comes to you then I would low ball them. If they want a firm offer give them 12 hours to accept. Be ruthless and be patient. If you get someone coming back to you, drop your bid again and give them another 12 hours and then drop it again.
Agree with you on the expiry date - that's one my solicitor suggested. If you don't specify an expiry date, then they can hold off - and also accept the offer anytime up to when it is officially withdrawn. 12 hours might be a bit aggressive at this point in the market cycle though.
Spot on brah....We are not half way thru ....
The climate change fiscal theft/ cost.
Spewtins land grab.
The Huge cost and stupidity of EV "everything,". ( Just wait for the Greens to ban EVs when the realise the blundering of Earth's resources, to build batteries, makes Eveready look like Saint Teresa.
Stalinda's economic rape and Pillage to appease the MMP devised minorities.
. .. Let's see where the world is at after the European winter... Let's hope it's a warm one.
Yeah, Caughtinthemiddle, great comment. I mean really.... is this the type of commentary we should expect from a highly trained professional?
"But fundamentally it’s going to be bumpy, we just hope it doesn’t get particularly bumpy."
"we just hope"... is that the job description for bank economists?
I always wonder what people mean when they say longterm...
10 years? (I don't think house prices will recover in 10 years, at all)
50 years? (I'm not going to be around, most probably)
50 millions? (humans are not going to be around, probably)
You need to be way more specific if you want to be taken seriously.
My guess a couple of months ago was a 30% drop from peak - so far we're at 12%
https://www.interest.co.nz/charts/real-estate/median-price-reinz
But I'm guessing that's because we're still at the Mexican stand-off stage - very few sales. Might heat up along with the weather - everyone with a house for sale thinks the winter is slow anyway and buyers will come out with the sunshine.
It will be interesting.
"absolutely necessary and inevitable real fall in house prices" yikes
"fundamentally it’s going to be bumpy" double yikes
"and cause a little bit more pain" triple yikes
good luck landlords!
looks like the script of no more than 15% is wearing thin.....something about emperor and no clothes
you can almost smell the bullshit on Sharons breath
because no landlord wants to know what she means by "particularly bumpy"
Problem is look at where interest rates will be by the time we get back to prices from 2 years ago so you will be no better off. Nothing actually changes the longer you wait the worse it is. Basically the minute you are financially able to get in go for it boots and all.
Nope. Because within a year or so interest rates will start being cut.
As I have said, a good time for FHBs to buy could be around May/June 2023, prices may be close to bottoming out by then and interest rate cuts won’t be too far away.
perhaps buy mid 2023, fix for a year. By mid 2024 the OCR is likely to be no more than 2.5%.
Lol which means by mid 2024 house prices will have gone up 30% again. With everything else tanking we could see even more money go into housing. It's a one way trip. Next up massive unemployment and you cannot even pay the rent let alone the mortgage. Nothing is stable. Bagdad is under live fire right now.
Facts are
House prices are falling right now maybe around 2.2% per month
RBNZ is just going to follow FED who have said rates will go higher until inflation comes down. No pivot until then also they will not go back to low rates or printing money again as this will just crush USD.
NZD has been devalued by around 14% over last 9 months against USD
House prices in many places in NZ are around 10 x average wage couples income this is unsustainable.
inflation around the world including New Zealand will take a while to tame maybe 18 months people are receiving large wage increases but not matching inflation this is also inflationary and never going back down
civil unrest happening in many places.
wars continuing
food shortages in many places
Believe me the house prices in New Zealand are going to crash and the country once it gets over the shock will be a better place as young people will have hope of buying own home and being able to afford to bring up kids without just scraping by each week.
Why would someone not be better off with a lower mortgage but the same outgoings? An employer is not going to give someone a higher payrise based on their outstanding mortgage balance.
Someone gets a 5% pay rise and puts 100% of that to increased payments, it goes 100% against the principal. Same applies to lump sum payments. A big difference on an $800k loan vs $500k loan.
Makes my blood boil a bit when they mention nurses. We are lucky to have any left at all. The decision to enforce vacination for nurses is criminal. I mean that quite literally. They broke the Nuremburg Code there. Everything I hear our dear leader say could have been scripted by Goebbels.
I know what the best estimate of the neutral rate is, even if they don't seem to be able to find it; it's the 2 year bond rate at 3.85%. Simples.
Yes....b-b-b-b-b-but how dare they expect people working in medical fields to be fully vaccinated against all viruses and diseases practical. It's almost like someone forgot to include that as a clause in their collective employment agreements. Or maybe they didn't? And that's why nurses were "sacked".
Following the science can certainly lead us down a wrong and inhumane path, taking risks with people's health that are not warranted when considering the 'big picture'. Also violating human rights. Too much 'single minded' in other words simplistic, thinking going on. If we followed the science to the letter we would have to insist on forcibly quarantining all obese people:
These findings indicate that the increased BMI and obesity convey an increased risk of infection for their contacts, although confirmation of this will certainly require additional studies. It is known that patients with obesity and influenza shed the virus for a significantly longer period of time than people who are lean, and that obesity creates a state of chronic inflammation which impairs the immune response and favors the emergence of new, more virulent influenza strains - Link
If we let house prices fall then as "common cents" claims we will "devalue spending". Why not just bypass houses all together and allow people to borrow $100k @ 2% p.a. to spend on whatever consumer goods they like. That's the ultimate end goal, nobody is actually building any new houses really. Existing houses are just a proxy to borrow as much as we can while trying to palm off the loan payments to somebody else.
Much like the share market, all gains since 2020 have been unjustified, and if things revert back to fundamental valuations everything should fall back to 2019 levels. And if companies and house buyers are in a more precarious economic situation now than in 2019, there is the potential to fall further. But anyone who thinks that any of the 2020-2022 gains are permanent is probably still in denial.
We welcome your comments below. If you are not already registered, please register to comment.
Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.