The SBA warns that property prices could fall 20% from their peaks when adjusted for inflation.
The housing market has shrunk this year. Real Estate Institute figures released this week showed that the number of homes sold fell nearly 30% in April compared to March and the national median price fell 1.7% over the same period. It was down about 5% nationally.
ASB economists said “three big housing problems” they highlighted last year as potential risks to the housing market came together – tighter credit conditions, interest rates higher mortgages and an increased supply of new housing.
They said the bulk of the impact of rising mortgage lending had yet to be felt, as it took about six months to pass through to prices.
About 60% of mortgages need to be reset within the next 12 months, including variable rate ones. Almost all would switch to significantly higher rates.
They said it was the “credit crunch” of new responsible lending rules and tight LVR restrictions that had “tipped the scales of the housing market”. While things may soon improve on that front, it would come as the mortgage rate pain hits.
“The large and rapid increases in mortgage rates in the second half of last year will begin to have a full impact on the market now, with an impact that will intensify as the year progresses. at which mortgage rates have risen – among the fastest on record – will create big headwinds for house prices in the second half of this year,” they said.
In total, they expected a 12% decline from peak to trough, bringing house prices back to where they were at the start of 2021, and still 27% higher than at the start of the pandemic.
But when adjusted for inflation, it was a correction of around 20%, the biggest drop since the 1970s.
The largest declines were recorded in Auckland and Wellington.
ASB economists said while higher interest rates were unlikely to lead to widespread mortgage distress and forced sales, the “rate shock” would take money out of people’s wallets this year.
“Much higher mortgage rates are also changing the calculus of potential new home buyers or those looking to trade. The “test” rates used by banks to assess debt service are where the rubber hits the road. These are increasing rapidly, in line with the general trend in mortgage rates. Banks are now testing rates north of 7%, down from an average of 6.3% in the middle of last year.
An increase in the supply of new homes was also helping to lower prices, economists said.
“We expect the supply of additional accommodation to come into use in the future. We’ve now been in a residential construction boom for five years now, and this bulge in supply should increasingly manifest itself in increased inventory and new listings.
“The housing shortage that has plagued the market for the past five years has quickly, if not completely, eroded as new construction outpaces plummeting population growth. However, the expected return of positive net migration in 2023 warns against too negative a development in the medium-term outlook for house prices.
Economists said they assumed the housing market would turn around and prices start rising again in the second half of 2023, linked to flattening mortgage rates and increased migration.
“It took two years for the housing market to ramp up, but only a few months for the pressure to be fully released.”
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