Editorial: Twenty-five per cent house price drop forecast by 2023/24 in new report - what that means

Editorial

EDITORIAL:

It's just one report but it's gone further than any of our economists, forecasting a fearsome 25 per cent house price plunge between now and later next year up to early the year after.

A 25 per cent drop would mean the loss of billions. So much is in real estate, mainly our own homes and for good reason: prices just kept marching ahead, year after year, enriching owners, denying buyers.

New research from Goldman Sachs's Australian-based Bill Zu reports: "We now expect a peak-to-trough price decline of around 20-25 per cent before stabilising around late 2023 or early 2024."

"More pain ahead" was his headline in the report which noted how rapidly our housing market is cooling, alongside what Zu called the aggressive tightening cycle by the Reserve Bank's monetary policy moves.

Even our most bearish economists have forecast less spectacular declines. Westpac has forecast house prices to drop by 15 per cent in the next two years. By May, it took a far more gloomy stand than it had previously and was less optimistic than other economists who forecast a 10 per cent price drop.

Jarden's equity research analyst Grant Swanepoel forecast prices to fall by 18 per cent by the end of next year from a national average of $905,000 to $740,000.

So how far have we actually come down since late spring/early summer last year when the market turned? The actual falls lag the forecasts - but not by much.

Zu noted that after about a 50 per cent increase since the pandemic started, prices dropped 11 per cent from the peak in the last quarter of 2021.

Auckland prices are now down 16 per cent from the peak. Sales volumes dropped to levels last seen in 2011. Annual housing credit growth has slowed to around the pre-pandemic pace.

Worse will follow if the RBNZ raises rates even further in anti-inflation efforts.

There's little dispute we've over-indulged in housing. Reserve Bank figures from last March show residential property represented 59 per cent of total household gross assets.

"With more than half of all household wealth in land and houses, New Zealanders have one very large egg in their wealth kete," the RBNZ noted this year.

Housing isn't without risks and past performance is no guarantee of future results, it also noted.

With unemployment so low, the most leveraged and those forced to sell in the downturn are feeling it hardest.

Howls have emerged from some of the most-stretched borrowers on interest-only loans. The Herald reported how interest-only home loans are getting harder to obtain as banks tighten up their lending criteria.

But take heart: mortgagee sales are still a tiny portion of the market.

Let's hope any big adjustment results in more gains than pain - and we learn from this.