Scaremongering about a housing correction

Despite various opinion pieces recently, the New Zealand property market is not heading for a crash. Given the sheer inertia of demand pressures in Auckland, we also think chances of a substantial correction are slim. This article lays out an answer to the question asked by Slade Robertson’s opinion piece in the NZ Herald on 01 November: are we heading for a crash or correction?

Auckland dictates the market

Auckland dominates about 30% of the New Zealand property market.  We expect house prices in Auckland to keep climbing over the next three years, even though Auckland is the most unaffordable region in the country. A considerable undersupply of housing will support Auckland prices which will limit any downside to house price inflation measured at a national level.

Undersupply keeps a floor under Auckland prices

We estimate Auckland’s housing undersupply at 45,000 dwellings. Although Auckland house price growth has been losing speed, the sheer scale of undersupply remains a floor under prices in the region. House prices aren’t expected to fall in Auckland until 2022, when additional construction will begin to offset some of this undersupply.

House prices will fall elsewhere in NZ

House prices are expected to fall by up to 5.0% during 2019 and 2020, as strong residential construction activity brings more houses online in parts of the country outside Auckland. 

Property markets around the country have already lost sales momentum and prices are expected to follow. In the September quarter, national sales were only up 2.3% from last year. Property markets such as Tauranga, Wellington, and Queenstown have all reported undersupplies, but sufficient consent growth in the past year, alongside reduced demand from slower population growth, will soon take the heat out of these markets.

But prices will pick up again before long

We expect house prices to hit their trough in the middle of 2020. But more buyers will be drawn back into the market by the second half of 2020 when the Reserve Bank reduces its loan-to-value ratio (LVR) restrictions and lending conditions improve.

At their June 2020 trough, house prices will still be higher than their pre-Global Financial Crisis (GFC) levels in all regions bar the West Coast and perhaps Gisborne. At the same time, prices in Waikato, Bay of Plenty, and Otago will still be around 30% higher than they were in December 2007 (just before the GFC). With house prices expected to hold well above their pre-GFC peak, correction is not the word we’d use to describe how house prices movements in the next few years.

A correction isn’t on the cards

Current conditions simply lack the drivers for a large correction. Although we acknowledge that several property markets in New Zealand are currently overvalued and highly unaffordable, we still find it hard to entertain any large downside in house prices. Slowing population growth will start to alleviate demand pressures, but the New Zealand population is still expected to grow at an above average pace during the next five years. This base of people needing houses will continue to support housing demand. 

Interest rates remain low, supporting mortgage financing. Even as interest rates rise, easing of LVRs will help draw more investors into the market from 2020.

Furthermore, the New Zealand economy and employment are still expected to grow at slower, but still comfortable rates, meaning that people will still be earning incomes that they can use to support mortgages. With these underlying conditions in play, alongside Auckland’s massive housing undersupply keeping upward pressure on prices, chances of a substantial correction are slim.

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