When inflation is low, its impact on changes to house prices is low. Nominal changes like demand and supply pressures are the main influences.
But when inflation is high, it masks the 'real' rise in house prices. Mortgages are always nominal and are always repaid in nominal terms, but asset prices do get set with some reference to inflation levels.
Community discussion of house price changes has avoided reference to "real" inflation-adjusted changes, focusing instead on "nominal" prices which are unadjusted for the likes of seasonality, inflation or other modifiers such as interest rates.
From 1995 to 2020, a quarter century span, inflation averaged only 2.0%, peaking only very briefly in this period at 5.3%.
But inflation has suddenly risen well above that level. It hit 7.3% in the June 2022 quarter and it could come in higher in the current September quarter when these levels are reported in about three weeks.
For almost all those 25 years, house prices have been rising, in nominal terms at least. Sure they flatten out, even dipped minorly in 2008, but that didn't turn out to be much of a correction. Certainly at that time inflation remained modest.
But recently we have a unique situation: house prices are falling and inflation is roaring. The combination eats away at 'real' house prices quickly.
The following two charts paint the picture. We have set January 2012 as the base, being a 10 year timeframe.
Nationally, nominal house prices were down 5.9% in August from year ago levels. But on an inflation-adjusted basis the decline is down 16.5% from a year ago.
Over the past decade, after inflation, median prices have risen from $355,000 to only $595,100 in 2012 dollar terms. We see $800,000 as the median price if we ignore inflation.
Most of this impact has been since the start of 2022. Not only have house prices retreated since then, inflation has jumped to levels not seen in a generation or more.
The impact in Auckland is even more pronounced.
The 8.3% retreat in August house prices from August 2021 isn't something we have seen for many generations. From the November 2021 peak, the decline to August has been 15%.
But when you adjust for inflation these changes are much more. On a year-on-year basis Auckland house prices have retreated 18.6%, and from the November peak they are down 23.1%.
By conventional definitions, Auckland housing is in a fast-building bear market.
97 Comments
As we had a double peak ,end 2019 ,end of 2021, and as mortgage interest rates are likely to stay higher for longer, coupled with real reductions in borrowing ability,and lower after tax earnings( net -of-tax wage increases) buying less ,in an extended inflationary environment,my pick would be a 4 year dip. Real ,inflation adjusted median house values might come back 40 %, easily enough.
@nifty I’ve always bought when I had the means to because I am in it for the very long term. There is no one, and I mean absolutely no one who can time the market. You only realise a few months later that “that was the peak” or “ that was the bottom” Just waiting for all the people who haven’t invested in property but know everything about it to now tell me I’m crazy….brace yourselves.
define very long term.
10 years
25?
50k years?
There is no one, and I mean absolutely no one who can time the market. <= you don't know that, this market is easily predictable. The bottom is when inflation is under the "neutral" value and central banks move to neutral OCR.
yes, if you buy now you are crazy, but well... your money, not mine
I answer you: No, I didn't make a fortune. Yes I made some money in making predictions (I made a couple in this very place that resulted pretty accurate). I don't call everyone else crazy, I said that you are crazy if you buy an house now (unless of course is a hugely obvious good deal)
Now please answer my question. What you mean by "very long term" ?
Because I feel that you don't have any idea (pretty much as anybody else mentioning this mythological long-term)
My prediction: at least -37.5% in 18 months since the last November.
Feel free to write it down
What is your one?
@lucenera, that exactly is my point - I can't predict what is going to happen in the next year or two and it's basically all noise to me. If your prediction is correct, I still won't be affected too much mentally as I'm cognizant of the unreal gains I've made since the pandemic. I never expected that to be sustainable.
The problem is, its not a true "market" is it!
For the most part govt & RB intervention drives the outcomes they want to see, an for the past 20 years that has been to drive housing prices up out of step with other fundamentals.
Now we have exaggerated inflation and the govt and RB are unable to intervene without wiping out the wealth of the country.
I tend to agree that once inflation is heading in the right direction and interest rates stop climbing house prices will stop falling within 6-12 months. prices will probably be flat for a while and start rising once the OCR comes back down.
Hard to predict when that will be as this inflationary burst has a mind of its own. If I was to pick right now, I would say bottom is likely to be end of next year and prices will have dropped 35% from peak by then.
The end will be when China/Russia/Iran/Venezuela win or loose the unipolarity/multipolarity competition with the US. The co-operative would win the moment it is forced to cut off all western allied countries from Chinese import and export markets while Russia cut off all western allied countries from it's exports. Shake and stir for 3 months and call it OVER22. Biden seems to think Taiwan is worth not sharing it's chips.
@iceman: You're right, of course, about timing the market. And, if you take the last 20 years or so as a guide, you're likely to think (like, e.g., Bernard Hickey) that there is a political consensus within NZ to protect house prices and so we are unlikely to see them fall much further.
OTOH, if you think we're facing an unprecedented combination of factors (rising interest rates, recent law changes on property investment, massive inflation, etc.), combined with fundamentals (income/price ratios) that still make housing massively unaffordable for many NZers, you might think that prices still have much further to fall.
So, I don't think you're crazy. But I don't think you should regard the alternative view as crazy either.
@ joe smith yes and no, there are other factors at play too namely supply and demand when immigration does eventually pick up (again thinking long term) Also, Auckland is not to dissimilar to Sydney, Melbourne and other major global cities with our property markets. I'm just wondering if people are actually expecting all those markets to crash too? And just FYI before anyone twists my words around, I'm not expecting rises any time soon.
The aggressiveness of the RBA’s monetary tightening has prompted Jo Masters – chief economist at Barrenjoey – to forecast a record 16% peak-to-trough decline in national dwelling values, with Sydney prices to fall 25%:
Ms Masters said on Monday the central bank will cause a recession if it raised rates as aggressively as markets expect… [They] expect the cash rate to reach 3.3 per cent by the end of the year, before peaking at 3.9 per cent in April next year…
Barrenjoey expects the RBA to stop raising rates once the cash rate hits 2.85 per cent, well below consensus estimates and just 0.5 percentage points above its current level.
Ms Masters said a 2.85 per cent cash rate was consistent with a 25 per cent price fall in the “very leveraged” Sydney property market and a 16 per cent dip in values nationwide.
“It will be the largest and the longest house price correction in modern history.
I'll take 16%, but I doubt that is the bottom, for the RBA and RBNZ have no choice to stop raising until the Fed stops. The Fed and its bankocracy will do whatever it thinks is necessary to hold the dollar hegemony, even if it kills millions at home and billions abroad.
All the optimistic thinking won't stop the WW3 we are heading into. Read up on the conditions around the globe in the 1920's and 30's, especially within Germany and Britain, the parallels will scare the living shite out of you. America was happy to let WW2 happen. They allowed their oligarchy to fund and support the Nazi's while tinkering in the politics of the region, ensuring the chaos would gain them the economic advantage at the other end. They are willing to attempt to do it again now.
BUT this time China is wealthy with commodity allies that allows them a level of self sufficiency. Their population is massive, educated and hard working, something that the west has allowed to weaken in themselves. China's militarily is now more than compatible in a bitter fight with NATO allies and they have built military allies in Russia and Iran who also are highly capable. NATO allies have been economically, industrially and militarily weakened through this conflict with Russia. China is standing with Russia not against it this time too, they know it's existential for them both. The west have oppressed and pushed away too many commodity rich nations and left them on the brink, and they are finding it an easier task to band to support the industrial powerhouses of the east who've been coming to their rescue.
The advantage does not appear to be in the US's favour this time around, I feel they may have overestimated the strength of their allies and underestimated the strength of their competition.
Houses may be falling in real terms, but even with recent falls, prices have risen much more than household incomes. So, they are still massively less affordable, in real terms, compared with 10 years ago.
According to the chart in the article, since 2012 median NZ house prices have more than doubled in real terms. By comparison, median NZ household income has increased by less than 50%:
https://www.ceicdata.com/en/new-zealand/annual-household-income/median-…
Based on fundamentals, house prices may have much further to fall.
It would be interesting to see how real house prices are tracking compared to nominal prices, but unfortunately this article doesn't show us that. CPI is being used in the wrong way here; the correct measure to use would be M3, which the RBNZ stopped reporting on years ago.
Real house prices don't fall because the price of tomatoes goes up, even if that causes an increase in the CPI.
Great work David - it would be interesting to see the national median house price chart, adjusted for inflation, over a longer time series. Say 20-30 years so that extent of the bubble, in real terms, can be put into perspective.
I don't think many people can see it for what it might be.
For example, if you combined it with the data from this article (if you still have it).
A long way down still to go. I expect another 20% drop in real terms, as interest rates increases have not really started to bite yet, and we still have a bunch of delusional specufestors ignoring economic reality and clinging to unreal expectations. Once house prices have decreased by approximately 40% in real terms, then we can start thinking about the market reaching sustainable and affordable levels.
What sort of area Juzz? I went through a 2brm art deco flat in Mt Roskill/Sandringham on the weekend - asking price 1.165... I imagine the owners will hold out for something around that mark as they only bought it a year ago for around 1.13. Another in the block sold recently for a decent price. I wonder if centralish Auckland is holding up?
Wellington region. If they bought it a year ago they're going to need to take a loss or hold it. I would say yes there are still some buying out there not paying attention and the odd sale going through. We went to an auction and a family of what I presume are recent immigrants bid themselves up a hefty price against the agents, no other buyers were bidding. I guess they saw how much prices have been reduced already and they felt like they were getting a bargain.
Someone on here also posted this property asking 365k less than they bought for this year, not a house I'm looking at btw as it's still overpriced.
https://homes.co.nz/address/wellington/island-bay/54-severn-street/DLJkr
Sold 2019 for $689k, then in 2020 $1.31m, then 2022 for $1.74m now asking 1.375m. All sales the same agent too
I expect another 20% drop in real terms, as interest rates increases have not really started to bite yet, and we still have a bunch of delusional specufestors ignoring economic reality and clinging to unreal expectations.
It's all about nominal in my books. That's the only way that the sheeple are psychologically impacted. People don't think about prices in "real terms."
why should they stop falling at forty percent?
half the investors lose money.assume another quarter barely make some income
you can value them at anything you like but what will happen if people can get 5% or 7% term deposit rates
and interest is costing 8%-10%
and stress testing at 10%-14%
thats the edge of the cliff I see getting closer and closer
who's going to buy a house when they go down 40% and three quarters of investors are making losses twice as large
why would you?
Until there is a significant drop in all spend (and thus inflation) and the employment rate drops (taking pressure off wage rises)... then the central bank rates and thus mortgage rates will keep rising.
The reserve banks need the economy to falter and go backwards a bit... before they think about taking their foot off the rate rise pedal. its not enough that inflation drops slightly to 5% or 6% for a bit and employment doesnt rise much again.
For that to happen i reckon we need another 5-6 months of rising rates.. maybe 5% ocr by then. Business start to feel the effect of reduced discretionary spend and lay off some staff... people accept house prices are 40% down and some need to move so trade houses at that level.
1 year term deposit rates were just shy of 9% at the end of 2007. We could easily hit that again.
https://www.interest.co.nz/chart/investing/term-deposit-rates
Iceman
I think as high as 90% of fhb's were using bank of mum and dad to stump up the deposit or assist
the reason its this high is because 90% of fhb's couldn't save a deposit
and if they couldn't save a deposit from income when renting then what income are they going to use to pay higher mortgage rates?
remember bank of mum and dad used a few emails to the bank, a chat with the solicitor and an agreement to use imagined up "equity" in many cases
but now you have to stump up with actual cash every fortnight
tough for those that "helped" the kids into homes when they all come running at once
its the same scenario with investors who used the imagined up "equity" in their own home
where do they find the cash to pay the mortgage increases coming
some will, some wont
its going be brutal for many.
I have significantly less sympathy for property investors trying to leverage taxpayer underwriting of finance costs into tax-free gains on assets than I do for FHBs, many of whom would simply have stretched to buy a modest family home.
One of these groups of people has a lot more of a case to answer for in terms of spiking our property prices for the last decade and a half than the other.
I'm not so sure that the Govt paying $2000 a week to house people in motels or spending billions every year buying/building houses is cheaper than allowing private investors to offset their interest costs against their gross rent for providing the same rental accommodation. If you want people to be housed, someone has to pay for the housing. Is it the Govt using the rest of us tax dollars, or private investors using their own money?
Iceman around only 5% of New Zealand population earn the required income to buy average house in Auckland from scratch. The income needed to buy 1.2 million house would be around 300k at 4 x income you would also have to have deposit, only 5% of population in New Zealand fit into this category. 1.4 million would just about get you a average house in Auckland other areas in New Zealand are a lot more affordable but over next few years everywhere will be 50% to 60% less so just hold on the longer you wait the smaller the debt will be. Now Iceman if you don’t understand this go and see a financial advisor I could of made a small fortune for you if I was charging.
@DTRH no need to get your panties in a knot mate, was just asking what your source of 5% was. Also why are you saying 5% of Nz population can buy a house in Auckland. Your avoiding my point about buying in other cities. Regarding financial adviser- perhaps if you knew my position you’d think differently ;p
Listen to the expert, eternal optimist
https://www.oneroof.co.nz/news/ashley-church-is-nzs-housing-market-real…
You could have summed it all up by just referring to the median income to house price multiple which takes in inflation and house price rises or falls automatically within the ratio.
And the ratio according to your data, NZ median income multiple has fallen from 8.9 to 8.17, and Auckland from 12.02 to 10.76.
Why don't you extrapolate the trend going forward of falling house prices and interest rates to see over what time frame it would take to get to a more affordable multiple, updated of course as you go.
You can have a play with the Taylor rule here. It is predicting around 6.5% for the Fed Funds Rate (depending on your assumptions) vs it's current setting of 2.5%.
https://www.atlantafed.org/cqer/research/taylor-rule?panel=1
Implications for NZ is that our rate will need to go at least 2% higher than this.
Its obviously not zero...but its obviously not going to happen in the next 12 months. But in the next 5-10 years. Yeah, now that is a possibility.
The probability of an OCR of 4% was zero according to many commentators here last year....but now its more or less a certainty...perhaps even 4.75-5%.
So I guess the moral of the story is, who knows what is going to happen.
Not sure what the fuss is about. A house is a house, either a roof over my head or a revenue stream to my pocket. The market value is irrelevant unless I'm selling.
Inflation goes up, wages go up, rents go up. My mortgage stays the same or goes down. Just have to wait a few years for the market to balance things out
Inflation is great for property owners who can afford the interest payments in the mean time and might usher in a golden time of positive cash flow on leveraged property investments once more.
Inflation is not great for anyone, particularly investors. Unless of course you liquidated your assets during the peak last year and are sitting on the sidelines waiting to buy. By the sounds of your spruiking you didn't, but that's fine, denial is just a stage and acceptance is not far down the track. Best of luck
I stopped going (putting it) up in mid-winter 2021 - July if my memory serves me. It was all driven by fairy dust so I stopped believing it & as a result, today, the balance sheet is still in reasonable nick. Indeed, it hasn't changed a lot for the last 3 years as the businesses took a hit the same time as the fairy dust was being sprinkled. Going forward this will 'settle down' hopefully, so I'm picking another 12 months of 'rebalancing.'
Long term, we're boomers with succession in place, so will still need to grow the businesses from here to keep up with the Jones.
By the Way: We do not have a housing shortage in NZ. We have a shortage of suitable accommodation for our growing welfare classes. There are thousands of empty houses out there with no one living in them because their owners don't want anyone living in them. I will be watching the North Asian situation carefully as many of our empty homes are Asian owned, and with things starting to get ugly over there, they may well need their offshore investments a little closer to home over the next 12-24 months.
PS: The construction industry is probably not one to invest too much in over the coming year. Maybe longer.
Most of our welfare class are pensioners. Over 50% of our welfare budget. On top of that, the welfare subsidies to landlords. But yes, the retirement resort industry is also on top of that, proclaiming a shortage of suitable accommodation for that welfare class and a plea for more taxpayer subsidies.
Has The RBA Greenlit Home Price Falls?
Fortunately the NZ$ is falling even faster, and the Labour Govt is handing out residency visas like lollies on an Air NZ plane, so the price of NZ real estate is getting cheaper and cheaper for foreign buyers. And the immigration tap has just been turned on full bore. Don't panic. While there might be a lot more homeless New Zealanders soon, the prices of NZ housing should stabilise once the wall of foreign money hits the auction rooms.
But do the foreigners want to come here, Australia just opened up their floodgates with higher wages and lower house prices. People seem to forget many who immigrate to NZ plan to use us as a stepping stone to get into Aus. Now our cost of living is up, the industries we want to attract are not competitive, houses are overpriced and interest rates are climbing. So apart from our low dollar to theirs wheres the incentive?
Most of the comments on here are very NZ focussed, and often housing focused, with very few looking what is happening in Europe and Japan. Here is an example...Germany is on the brink of collapse, Japan following. If they go down, we all go down, and far more than a housing crash....deep long recession, or worse...the D word. Bank failures even.
https://www.youtube.com/watch?v=7xGN2AF5TjQ
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