The average home value in New Zealand has fallen more than 13% from its Covid-era peak, according to the latest QV House Price Index.
That average is flattered by the relative stability in Canterbury and few other Southern regions like Queenstown, Southland and the West Coast.
Christchurch City’s average home values are just 0.2% lower than the nationwide peak. Prices in those other regions are actually above the nationwide peak in 2022.
Meanwhile, in Auckland and Wellington, there has been a wipeout on a scale that used to panic the Reserve Bank when it imagined catastrophic scenarios to stress test the financial system.
Values in Auckland now sit 19.7% below the nationwide peak of January 2022.
Home values in Wellington City are 27.3% below the nationwide market peak.
This housing slump is certainly worse than the Global Financial Market Crisis (GFC) in 2008.
After the GFC, the average national house price fell about 5%.
Economists Arthur Grimes and Sean Hyland (from Motu Economic and Public Policy Research) did some work which showed that in real (inflation-adjusted) terms, house prices fell 15.3% between 2007 and 2011.
On the same basis, the last three years in Auckland and Wellington would represent not just a slump, but a serious crash.
Infometrics chief forecaster Gareth Kiernan noted this week that at the same stage of the last two major property cycles (13 quarters after the December 1997 and December 2007 peaks, respectively) house prices were only 2% and 5.5% below those respective peaks.
Okay, we should acknowledge that the peak in 2022 was exaggerated and artificially inflated by Covid stimulus.
Sure, you can call it a phoney boom. But that doesn’t make it any less real for those who bought houses at peak and now find themselves in a worrying position of having negative equity – or worse – facing a mortgagee sale.
Numbers out from property data firm Cotality last week showed the number of people making losses when they sell their homes is at the highest level since 2014, with Auckland sellers being hit particularly hard.
Home owners also have short memories. We should factor Covid stimulus gains into our maths when we consider our relative wealth. But we don’t.
The hit to consumer confidence and retail spending is all too real.
And unfortunately, while some regions are recovering, I don’t think the Wellington and Auckland markets are about to turn around.
The REINZ house price index, which came out on Thursday, fell by 0.5% in seasonally adjusted terms in July.
That was led by a chunky 1.2% fall in Auckland.
Looking at those numbers, Westpac senior economist Michael Gordon noted that Auckland’s stock of unsold homes on the market has been rising again in recent months (in contrast to the rest of the country).
A slump of this size used to be the stuff of nightmares for the Reserve Bank (RBNZ).
A decade ago, when house price rises were in overdrive, the RBNZ ran stress tests that looked at the impact of house price falls of both 20% and 30% on the banking system.
The concerns it had about banking industry risk led to the development of stricter lending criteria – devices such as loan-to-value ratios (which limit the amount of lending banks can do to customers with low levels of equity) and debt-to-income ratios (which limit lending based on the ability to service payments).
It’s fair to say they did the job. Banks have survived this historic downturn unscathed.
Hooray, thank goodness all those Aussie shareholders aren’t suffering, I hear you say.
Sarcasm (and big profits) aside, it is good for all of us that the financial system has stayed strong. We all know who’d be doing the bailing out if the banks started collapsing.
The bad news is that the wider economy hasn’t coped as well as the banks.
We are clearly, as the RBNZ and many others (including myself) warned, overly reliant on the property market to bolster our economic growth.
Aucklanders in particular have lived on the sugar high of rising property prices for too long.
Now we’re going cold turkey.
Property values have become the biggest driver of consumer confidence.
And so much of Auckland’s small business economy is built around property-related services: building, renovation, driveways, roofing, pools, sheds, landscaping, interior decorating and more.
The city doesn’t have the manufacturing sector it once did, and the tourism sector is still struggling to get back to pre-Covid levels.
If there is an upside to this long, painful process, it is that it may drive a much-needed cultural shift around property in Auckland.
The city needs to push harder to develop other drivers for economic growth.
We do have a growing tech sector and there’s a movie and video games industry. But as much as we want to be a smart, innovative economy, these sectors aren’t coming to the rescue fast enough.
The idea of an extended property sector downturn that helps revitalise the productive is nice in theory.
But in the real world, it may involve too much pain and risks long-term damage to the economy.
We should be hoping to find some sort of middle ground.
We don’t want to see a bungy-like bounce from bust to boom and then another bust.
But we need some growth back in the property sector.
There needs to be some motivation for construction companies to keep building, and we need the economic shot in the arm that housing market confidence can deliver.
I’m optimistic that we might find the sweet spot this time.
We are yet to see the full benefits flow through from the Official Cash Rate cuts we’ve already had.
We can also expect rates to go lower. Another 25-basis-point cut is looking like a dead cert when the RBNZ meets next Wednesday.
After that, economists are divided between optimists who think that will be it and pessimists who think we’ll need another one or even two cuts by the end of the year.
Growth will eventually return as borrowing costs fall.
But the prospects of another housing market boom in Auckland look very distant.
Liam Dann is business editor at large for the New Zealand Herald. He is a senior writer and columnist, as well as presenting and producing videos and podcasts. He joined the Herald in 2003.
