NZ house price fall predicted

NZ house prices expected to fall

From 2022 to 2024, according to the Reserve Bank

The Reserve Bank of New Zealand (RBNZ) is now forecasting that house prices will fall from 2022 to 2024.

The forecasts are contained within the RBNZ's latest Monetary Policy Statement. The RBNZ also reiterated that current prices are not sustainable and provided plenty of technical language and reasons to support their statement.

Many other experts have started to support this theory too. Could they be right?

Why the experts might be right – house prices could fall for a couple of years

Lower demand, people are leaving NZ

In explaining some of the detailed reasoning behind what it is forecasting, the RBNZ says underlying demand for housing due to population growth has declined significantly since the outbreak of Covid-19 last year. While NZ citizens who returned from abroad before the pandemic stayed on and others returned early in the outbreak, this inflow was short-lived. Border restrictions have since limited inward migration, and there has been a small but steady flow of departing residents. This means there has been a net outflow of people from NZ since early 2020.

In other words, more people are leaving NZ than are arriving, which reduces demand for housing.

Building boom

There’s plenty of building going on, and the RBNZ cites data which suggests that by the middle of 2022, the total number of houses will be growing at its fastest pace since data became available in the early 1960s.

Interest rates

A lot of talk and news has begun about interest rates going up. This has been well-signaled to the market. As interest is a major cost when purchasing property, this increased cost might suppress demand by making mortgages unaffordable. Despite commentary that this will impact property investors, this could also hurt first home buyers worst of all. First home buyers usually have more debt relative to their income, and less ability to adjust their financial affairs to make increased repayments. Property investors, with greater income and assets, usually have a lot more choices when it comes to making higher repayments.

Higher costs for landlords might mean more houses are on the market

With the loss of tax-deductibility on existing rental properties and increased costs for council rates, higher income taxes, interest rates, and costs to meet new regulatory standards including the ‘healthy homes’ legislation, there are likely to be more property investors selling into the market.

Why the experts might be wrong – house prices could keep climbing

There are plenty of reasons to not place too much value on predictions. Here are a few.

Predictions are always wrong

Nobody knows what the future holds. Making any detailed plan or projection for the future must be done knowing it will be incorrect by some margin. The real question is “how wrong will this prediction be?”

Some predictions are only a little wrong, while others are miles off the mark.

Fact-check: the RBNZ have said this before

In May 2020, the RBNZ predicted NZ house prices would fall by about 10% due to the initial Covid-19 outbreak, instead they went up about 30%. In other words, they were wrong by a gigantic 40%. Now, that’s not to say they’ll be wrong by 40% again, but it’s a fair indication of what can go wrong when any person or organisation predicts the future, especially during such uncertain times.

Some things have changed, but a lot hasn’t

While there is a good list of sensible reasons to think property prices will fall, similar reasons were given last year, and property prices skyrocketed.

Across most of the country, prices have been rising 'unsustainably' for 10 years now – yet they sustain.

Despite changes, most of the things that have changed don’t matter. The cost of building new homes is still high, and rising, which puts a “floor” – a lowest possible level – underneath how far house prices could fall. This is largely based on:

  • Building supply shortages, such as wood, steel, and fittings imported from overseas.
  • Shortages of skilled tradespeople and other professionals.
  • Most importantly, constraints on zoning, permissions to build, and other regulatory hurdles. One commentator has gone so far as to say we have “…incompetent councils that make it hard to build anything. We’ll call this the ‘mindless bureaucratic tax’ that is rife in Government and consistently drags down New Zealand’s productivity.” In a country like NZ with population density among the lowest in the world, this remains an embarrassing hurdle. In the purest terms, there is no shortage of NZ land to build on, and no shortage of wood to build with, the issue is over-regulation.

Learn more: Why do cities become unaffordable?

Interest rates won’t go up that much

Despite all the headline-grabbing stories about interest rates about to rise, nobody expects them to return back to historical average levels. That means mortgage interest will remain ‘cheap’. Some people think they might not go up much at all.

Also, all it would take is another natural disaster, epidemic, or any other major unforeseen event to keep interest rates as they are, or perhaps cause them to fall even further.

Migration will resume

Most ‘appealing’ countries with bearable migration laws have some sort of housing affordability issue. Quite simply, people want to live in safe countries that offer residents and citizens reasonable rights. This leads to more people moving there from less desirable countries, which puts pressure on housing and housing prices.

Learn more: House prices are climbing in most desirable countries.

At some point NZ’s borders will reopen to migrants, and its likely a flow of new arrivals will be hoping for housing.

Talking the book

In theory, the RBNZ are independent. However, several things challenge this independence:

  • The government, who the RBNZ are supposedly independent from have asked the RBNZ to consider impact on housing affordability on decisions they make.
  • The RBNZ have offices across the road from parliament, and the RBNZ staff are civil servants on the government payroll.
  • Over the last year or so the RBNZ’s actions have become increasingly politicised, they’ve drawn criticism from many sides, and have been caught in political crossfire. This is largely around real or perceived RBNZ actions which have pumped up the housing market, including chronically low interest rates (but the RBNZ have also been heavily criticised for several other things, including spending $400,000 of taxpayer funds on a lobby sculpture, during a global pandemic, when plenty of Kiwis are facing very real challenges).

So what? Well, as housing affordability is becoming such a social issue – and a political hot potato – maybe the RBNZ could be forgiven for getting themselves out of the spotlight of partial blame for housing affordability by predicting that prices might fall in a couple of years’ time. When 2022 rolls around, nobody will recall what they said now anyway! In short, the RBNZ is under pressure over housing affordability, which may (or may not) impact on their ability to give an accurate forecast.

The bottom line – house price forecasting

At this stage, we think that an oversupply of housing, and thus dip in prices will be short-lived – if it happens at all. If a drop occurs, it will probably be a short-term cyclical move against a back-drop that means house prices will stay largely on a steady upwards path. Any price fall can be expected to gradually recover. As always, whatever you make of this comes down to your current situation, along with future plans, goals, appetite for risk, and timeframes.

If you’d like to discuss anything above with a trained professional or a mortgage broker (adviser), please let us know. It would be our pleasure to assist.