BNZ economists are picking that the house price correction is over, which means prices will be levelling out still about 20% higher than they were before the pandemic.
In his latest Property Pulse publication, BNZ chief economist Mike Jones said the BNZ economists' long-held view was that NZ’s house price correction would "run out of steam" around the middle of this year, with prices 15-20% below the 2021 peak.
"Our confidence in such has grown to the point that we’re now sticking a fork in the correction and calling it as roughly done at levels around 16% below the peak," he said.
He now sees house price growth resuming over the second half of this year. "But only at modest rates of around 1-1½% per quarter," he said.
"That is, we remain of the view that still-high mortgage rates, stretched affordability, and sluggish economic conditions will all constrain the extent of the upturn. We see annual house price inflation at -2% by the end of this year (from -12% currently), rising to +7% over calendar 2024."
He said if the pick about the bottom of the market was correct, this would still leave house prices about 20% above pre-pandemic levels "and still elevated on any number of valuation metrics".
Jones said the "tools-down" by the Reserve Bank (RBNZ) - its decision to hold the Official Cash Rate at 5.5% for now - is seen more as "removing a source of downward pressure on house prices" rather than something likely to provide a strong boost.
"After all, RBNZ data show the major banks are testing new borrowers on 8.5-9.0% mortgage rates, and rates don’t look like they’re going to come down anytime soon.
"Still, the light at the end of the mortgage rate tunnel is likely to help lift buyer confidence off the floor and, in turn, assist the nascent recovery we’ve seen in various housing activity statistics like monthly turnover and days to sell. Even at current levels, sales-to-listings ratios – a proxy for the demand/supply balance in the housing market – are suggestive of a stabilisation in prices."
Talking about the recent surge in inbound migration, Jones said extra population will add to housing demand.
"If mortgage rate dynamics have played out loosely as expected, population dynamics have not. The extraordinary boom in inward migration numbers is turning out to be a game-changing development for the economy, and it certainly has implications for the housing market.
"The surge in residential construction of recent years had, in combination with closed borders, restored balance to a market that, pre-Covid, was probably undersupplied to the tune of 50-100k dwellings.
"Now, with population growth surging again and construction activity slowing, we’re, conceivably, in the process of moving back into a position of excess demand for housing. Our rough projections have incremental demand nudging above incremental supply over 2024."
The extra pressures on housing resources is likely lead to upward pressure on prices and rents, he said, though the extent of such is "anyone’s guess".
On the projected gains for the housing market in coming months, which Jones has "pencilled in" at around 1½% per quarter, on average, from the third quarter of this year through 2024, Jones said he had retained an expectation "that the upturn will be fairly tepid".
"The end of the downturn does not a boom make. There are still some stiff headwinds facing the housing market, namely:
• Mortgage rates are set to remain around current high levels for some time. This, and the more general cost of living crimp on incomes, means the serviceability burden on new borrowing will remain high.
• Despite the sizeable correction of the past 18 months, NZ house prices are far from ‘cheap.’ Valuation metrics (see appendix) show that the degree of stretch to anchors like rents, incomes, and offshore equivalents has reduced but remains elevated.
• The economy isn’t in a great spot. Growth is recessionary, and the labour market is set to deteriorate. The fact we’re comfortable forecasting a small house price recovery in this environment reflects the fact our projected lift in the unemployment rate is relatively mild, and is driven more by extra labour supply than widespread job losses. But should things turn out worse than we’re expecting, we’d expect the housing market green-shoots to wither pretty quickly.
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