Market down, but not out

Warnings that house prices could fall by 20% are disturbing, but experts say the situation is not as dire as it sounds. Miriam Bell reports.

The housing market has been easing for some time. The latest Real Estate Institute figures show the number of houses sold in April was down almost 30% compared to March and the national median price dropped 1.7% to $875,000 over the same period.

Price falls since the peak of the market are larger, according to the institute’s house price index. It has the national median down 6.2% since November, and Auckland and Wellington’s prices down from their peaks by 10.2% and 10.4% respectively.

But ASB and Westpac have now predicted prices could drop 20% from their peaks, when adjusted for inflation. That would be the biggest fall since the 1970s when they decreased by about 40% between 1975 and 1980.

That sounds scary, but as many experts have pointed out it would still only return prices to where they were early last year. So what do falling prices, plus more muted sales activity, mean for the market and for buyers?

CoreLogic chief property economist Kelvin Davidson says the inflation-adjusted price falls being suggested are plausible, and steeper than in the global financial crisis (GFC) when they dropped around 15%.

Prices rose faster and over a shorter period over the past two years than they did over the preGFC period, and that highlighted their rapid decline this year, he says.

‘‘That is reflected in a real change of mood and pace in the market. Listings are up and buyers are taking their time because they have more choice, which gives them more pricing power.

‘‘But it doesn’t seem there is a huge wave of sellers desperate to sell. Unemployment remains incredibly low and, although interest rates have gone up considerably, people’s serviceability has been tested.’’

People who bought late last year with a minimal deposit and stretched themselves in terms of loan relative to income were more vulnerable, he says.

But most homeowners would not be in a situation where they were facing negative equity, although they face higher loan repayments when they refinance. And in the first

The only time prices really collapse is when you have a market with lots of desperate sellers and no buyers, and that is not what we have. John Bolton Squirrel chief executive, left

quarter of this year there were just six mortgagee sales, compared to a peak of 777 in 2009.

While there may be a lag before distressed sales increase, there are more buffers in place than there were in the GFC period, Davidson says.

These include loan-to-value ratios, tougher serviceability criteria, a strong labour market, and greater bank willingness to avoid mortgagee sales.

‘‘It means we are in a safer position than we were in the GFC, although the labour market is key to that, and if lots of jobs started to go it might change the situation.

‘‘I don’t think the market is in for a hard landing. Rather, it is going through a correction. But after such a fast upswing, it was inevitable that we would get some unwinding from that excess.’’

Squirrel chief executive John Bolton agrees the softness in prices is related to the overenthusiasm of last year, but says the real pain will be felt by builders and developers.

While prices have been falling since Christmas, some parts of the market are affected more. He picks properties bought for development as a risk area, one where prices may have already fallen by 20%.

‘‘With the rest of the market, I doubt there’ll be a huge crash in prices. The only time prices really collapse is when you have a market with lots of desperate sellers and no buyers, and that is not what we have.’’

Low unemployment means sellers are not desperate, and most are adjusting their expectations.

Bolton says he is currently selling a property, and while he would have got about $2.1 million for it last year, he expects about $1.8m for it now.

‘‘I’m fine with that. Sure, I missed the market peak, but I’ve had it for 10 years, and it will still sell for far more than it would have a few years ago. It’s still a win for me.’’

Buyers may not be as active, as borrowing constraints are a factor for many, but immigration will start to pick up again, which supports the market, he says.

‘‘And for those buyers who are active, the drop in prices is good. They have more and better options now than they did, and that means they can get more for their money.

‘‘I have some clients who were trying to buy their first home in Auckland last year. Nothing worked out, so they gave up. A couple of weeks ago they bought a lovely home in a central suburb for the same price they would have paid for a vastly inferior property last year.’’

Harcourts managing director Bryan Thomson says while price and sales data clearly show the market has shifted significantly, the demand for homes is still there.

It is necessary to look beyond the obvious comparisons with 2020 and 2021, he says. ‘‘Last year and the year before we had the most active and strongest markets we have ever seen.

‘‘There were clear reasons for that, and some of them have changed.

‘‘The Covid stimulus package has largely gone, and interest rates have risen from record lows. There is also now global uncertainty because of the war in Ukraine.’’

But employment remains strong, which keeps a floor under the market, and while interest rates are higher they are still attractive because they remain below the historical average, he says.

‘‘Once you get past all the hype and hyperbole, the reality is we are transitioning from an extraordinary market to a more normal and balanced market.

‘‘Sales are happening as sellers come to terms with the need to accept prices that are lower than they could have achieved last year, but which still come with gains. The sellers who won’t accept the change are the ones who struggle.’’

The desire to own a home and changing life conditions, such as the arrival or departure of children, marriages and breakups, mean there are always people who want to buy or sell real estate, Thomson says. ‘‘That never changes, so the market will keep ticking over. As it always does, even if it is no longer super-charged and prices are a bit lower.’’