House prices expected to drop 15-20% from peak with trough in second half of this year

An economist says the Reserve Bank's gloomy monetary policy statement in late November reverberated through the housing market. Photo / Getty Images

By Nona Pelletier, RNZ

Annual house prices continue to track down with the market expected to fall between 15 and 20 per cent from its peak, potentially hitting the trough in the second half of this year.

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

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 per cent 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 statement 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 homeowners 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 delist,” 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 per cent, New Plymouth at 2 per cent and Queenstown at 8.3 per cent.

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

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 per cent 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 people would borrow with fixed rates of one or two years.

However, he said fixed mortgage rates were likely to remain above 7 per cent as long as inflation remained high, with the RBNZ forecasting annual inflation to drop to 2 per cent 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 per cent, 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.

Meanwhile, OneRoof’s latest house price report showed the nationwide average property value falling $118,000 in the last 12 months to $977,000.

However, the downturn may be losing momentum, with data from the OneRoof-Valocity House Value Index showing a slowdown in the rate of decline in some regions and major metros.

The overall rate of decline has gone from a peak of 4.3 per cent in the September quarter to 3.1 per cent in the three months to the end of January.

Auckland’s average property value fell 15.1 per cent ($238,000) to $1.341 million in the last 12 months while Greater Wellington’s dropped 21 per cent ($237,000) to $892,000. The average property value in Hawke’s Bay and Manawatu-Whanganui also dropped by double-digits.