Budget 2023: House prices to fall 21 per cent and not recover to record highs until 2027, Treasury says

House prices are likely to continue dropping until next year, the Treasury is predicting in today’s Budget.

That means prices should ultimately drop 21 per cent below the peak prices hit in November 2021 before they begin to slowly rebound in mid-2024, Treasury said in its Budget 2023 update.

Those figures include an expected 13 per cent annual drop by June 2023 and then a further 5 per cent annual fall through to June 2024.

High interest rates and weaker wage growth are behind the falls, Treasury said.

“The Treasury expects higher-for-longer interest rates to continue driving house prices lower,” it said.

Treasury said that - while household incomes will continue growing - Kiwis won’t see their incomes rising as fast as in the last few years due to labour market pressures easing as businesses find it easier to recruit employees and contractors.

“Annual wage growth is expected to fall from 7.3 per cent in early 2023 to a more moderate 4.2 per cent by mid-2027,” Treasury said.

It said tighter bank balances will subsequently lead to “relatively flat” household spending this year as more money goes towards paying the mortgage.

“Falling wealth weakens household balance sheets and has the most significant impact on consumption.

“Meanwhile, more moderate wage growth and higher mortgage and deposit rates mean more income is diverted away from spending and to mortgage payments and savings.

“From 2024, the Treasury forecasts consumption growth rising as interest rates fall, relieving pressure on wealth and real wages.”

The Government said this meant household spending would rebound slower than the earlier forecast in its Half Year Update, with Treasury blaming “higher-for-longer interest rates” for lengthening the period in which households keep their purse strings pulled tight.

Treasury also expected the house building boom to slow.

That was due to falling house prices and high construction costs making it more difficult for developers and extra pressures caused by widespread flood and landslip damage in the North Island.

“With building consents continuing to fall, the Treasury forecasts residential investment to fall by a further 3.6 per cent over 2023, before beginning to recover from 2025,” Treasury said.

“While net migration will add to demand for housing, this is expected to have a limited impact on residential construction given the already significant increase in housing supply over the past two years.”