Banks are being less than apocalyptic on their expectations for a post-covid housing market correction, which could be as low as 5 per cent, although they warn of potentially significant regional variations.

ASB Bank economist Mike Jones is forecasting a modest 6 per cent decline in national house prices, on the back of higher unemployment and slowing population growth over the latter part of the year.

He said the post lockdown market was already reflecting significant regional variation, with house prices in Otago having fallen 4 per cent since February on the back of reduced tourism in the Queenstown-Lakes region, while Auckland prices were was down 0.5 per cent over the same period as fewer migrants headed to the city. Hawke's Bay, Gisborne and Wellington markets continue to fire, however.

But Jones expects the market to stabilise and gradually recover next year, in line with lower unemployment, although he said that could be even faster if loan value lending restrictions aren't reinstated.

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ANZ has given itself a wider window - forecasting a dip in a range of 5 per cent-to-10 per cent. In its latest property focus report, the bank explained away the June rebound as reflecting "pent up demand for sales and a post lockdown bounce in spending" across the broader economy.

Cash flow relief

Cash flow relief has also been a major driver, it said, supported by lower mortgage rates, deferment schemes and wage subsidies, "which have cushioned incomes and delayed job losses."

Seasonally strong domestic tourism through the winter months is also providing a temporary economic boon, at a time when "many New Zealanders would otherwise be travelling overseas to warmer climates."

However, much of that has been a temporary reprieve with the wage subsidy due to expire in September and income relief payments falling away the month after.

Liz Kendall, senior economist with ANZ, said rates have also provided those who are in a good employment position to enter the market.

And it has bolstered housing activity occurring in lower price brackets, reflecting the first home buyer boost many had been expecting.

ASB's Jones said the combination of a levelling off in house prices and rock-bottom mortgage rates has potentially been a boon for those first-home buyers that "haven't had their jobs and incomes impacted by the recession."

And the ditching of loan-to-value ratio restrictions will also be assisting borrowers with lower than average equity, he said.

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Households remain cautious

ANZ's Kendall suggests that although house sales have rebounded, households are conscious of their financial positions and are wary about buying 'big ticket' items.

That is reflected in the bank's latest consumer confidence survey which shows the number of households considering a major household purchase remain at recessionary levels.

So while lower rates are making it cheaper to borrow, people are leery about taking on more debt - and demand for credit is down.

Banks are also adopting a more cautious attitude on risk, new lending numbers reflecting only a marginal increase in loans with less than 20 percent equity.

Headwinds

Kendall said while lower rates will limit the downside for the housing market, it won't be enough to "work against emerging headwinds to the extent required to prevent a meaningful fall in house prices."

She said previous, pent-up demand for houses had been building "due to scandalously tight supply conditions."

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"But our housing shortage is now eroding due to an influx of short-term rental properties moving into the long-term market, as short-term demand from international visitors is now lacking."

The ANZ report suggests that the tip in the balance between demand and supply is "consistent with lower house prices and realignment of expectations."

Kendall believes this will become more evident as new home builds become available, built on the strength of expected population growth. "But new supply will take pressure off the market as these builds come on stream, dampening prices."

She noted that if the housing market deteriorates more than expected, it was likely the Reserve Bank will "pull out all the stops" to shore up the outlook, not ruling out the official cash rate moving into negative territory.

While a negative OCR could unhelpfully impair credit supply, the tightening will potentially be "concentrated in riskier sectors, like business and commercial property lending."

Downward apartment market

She said this could be bad for investment but not necessarily such a headwind for the residential property market.

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Those headwinds were already being seen in the apartment market, particularly at auction level, considered the 'canary in the coalmine' of the residential investment market.

Robbie King, a broker with Auckland based Apartment Specialists, reports recent auction clearance rates in the city at about 33 per cent, a clear reflection of a downward market.

But, he said, apartments are a "much more complex asset" than houses. "Your average buyer prefers to secure the purchase first, then do the investigation rather than go 'all in' at auction."

He said while auctions don't offer a clear picture - because sales by negotiation or tender are often not visible for months after the initial contract date - it does provide an "early indicator of market confidence" and that is reflecting a shift to a buyers' market.