House prices have declined about 10 per cent. Photo/ NZME
House prices have declined about 10 per cent. Photo/ NZME
Economists around the world are keeping a close eye on what happens to the New Zealand housing market amid the aggressive tightening of our monetary policy.
"We are a bit of a test case, something like a crash test dummy," CoreLogic chief property economist Kelvin Davidson tells the target="_blank">Front Page podcast.
"The world is watching us in terms of being one of the first countries to actually start to tighten monetary policy and pass that through to mortgage rates, which in turn passes through to falling house prices."
Davidson says that average house prices in New Zealand have fallen about 10 per cent since December 2021.
One of the major contributing factors to this decline has been the increased "cost of money" as the Reserve Bank raises interest rates.
"Mortgage rates have gone from around 2.5 per cent to 5.5 per cent in quite a short space of time. The credit environment was a key driver of the upswing and now it's become a driver of the downswing... we have less money available and it's costing more."
New Zealand's Reserve Bank has adopted one of the most aggressive approaches of any central bank, raising the Official Cash Rate from 0.25 per cent to 3 per cent over the last year.
Markets that have been more cautious are now watching New Zealand for an indication of what might happen next.
Davidson doesn't think the housing market has hit the bottom yet.
"It's a fairly reasonable assumption that house prices will fall 15 per cent from the peak," he says.
"We're already down 10 per cent, so we perhaps have another 5 per cent to go."
Davidson believes we could see that decline in the first half of next year, but it is largely contingent on unemployment remaining low.
"If we did start to see those recession risks emerging, and maybe some jobs starting to be cut, then you'd have to think house price falls would be bigger. You then might be looking at a fall of 20 per cent in house prices."
So which way is unemployment likely to go in the coming months?
"The Reserve Bank has forecast a rise in the unemployment rate, but that's more a case of people returning to the labour force. It's not actually outright job losses. And that's an important distinction."
Davidson says that provided we don't see a sharp increase in job cuts caused by businesses coming under increased pressure, this will be seen as a "managed downturn" rather than an outright crash in the housing market.
He adds that it's important to view the decline in property prices in the context of the highs they are coming from.
"You've got to remember that between March 2020 and December 2021 values went up about 40 per cent. That was a very, very sharp increase. The fact that they have now fallen about 10 per cent still leaves us 30 per cent higher than we were pre-Covid."
Davidson says it's important for any homeowner to take a longer-term view when it comes to housing trends, rather than focusing on the short-term gains or losses.
• The Front Page is a daily news podcast from the New Zealand Herald, available to listen to every weekday from 5am.
