1 Feb 2023

House prices expected to drop further 15-20% in second half of year

4:55 am on 1 February 2023
Houses around Lyttelton area in Christchurch

House prices fell in all the major centres and regions, apart from Gisborne. Photo: RNZ / Nate McKinnon

Annual house prices continue to track down with further falls of between 15 and 20 percent expected in the second half of this year.

January's CoreLogic House Price Index saw residential property values fall 7.2 percent over the year earlier, which was the biggest 12-month decline since May 2009's drop of 7.9 percent.

However, CoreLogic chief property economist Kelvin Davidson said last month's drop was smaller than the worst of the global financial crisis, when prices fell 9.7 percent in the year to March 2009.

He said the green shoots of optimism seen in October and November, evaporated following the Reserve Bank's gloomy monetary policy satement in late November, which pointed to rising interest rates and a recession from the middle of this year.

"We're not seeing any real evidence yet that home owners are looking to ramp up their selling activity - with unemployment still low, they can generally sit on the market for as long as it takes, or just de-list," Davidson said.

"But at the same time, buyers in a comfortable borrowing position still hold the balance of power when it comes to pricing, and this has clearly driven a further leg down for values in January."

House prices fell in all the major centres and regions, apart from Gisborne with an annual increase of 0.4 percent, New Plymouth at 2 percent and Queenstown at 8.3 percent.

It was a different story in Wellington with an annual price drop of 18.1 percent, while Auckland and Hamilton fell 8.2 percent, Dunedin down 10 percent and Christchurch down 1 percent.

Davidson said mortgage rates were probably at or near their peak, with further increases in the Reserve Bank's official cash rate (OCR), forecast to peak at 5.5 percent, already priced into current fixed mortgage rates.

"Floating rates will tend to track the official cash rate so they probably haven't peaked. However, not many people borrow on floating rates," he said, adding most peple would borrow with fixed rates of one or two years.

However, he said fixed mortgage rates were likely to remain above 7 percent as long as inflation remained high, with the RBNZ forecasting annual inflation to drop to 2 percent in the third quarter of 2025.

"So I wouldn't be anticipating any marked falls in mortgage rates until into next year or perhaps even after that because (the RBNZ) really has to get inflation back in the bottle."

Fourth quarter annual inflation for the three months ended December was 7.2 percent, which was unchanged from the third quarter.

Davidson said it was too soon to tell whether the recent change of political leadership would have a material impact on house prices, with Prime Minister Chris Hipkins taking over from Jacinda Ardern and a general election to be held on 14 October.

"No doubt some existing and would-be property investors will be hoping for a National victory and a follow-through on their promise to reverse Labour's brightline and interest deductibility changes," he said.

While investors and first time buyers would be looking for bargains, there were still a number of challenges for borrowers looking to finance a purchase.

He said loan-to-value bank lending restrictions (LVRs) which required big deposits on mortgages, were a high hurdle for would-be buyers to jump.

Separately, the online advertising portal, realestate.co.nz says average asking prices for homes fell 10.5 percent last month to $900,000.

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