Falling house construction over 2023

Guest post from Tony Alexander

This is my last column on the state of the residential property market for 2022 so Merry Christmas everyone and here’s looking forward to a year coming up of more changes in the property sector. While many people will think that the biggest of those changes will be prices falling, my gut tells me that we have already seen the bulk of the correction downward in prices from the absurd levels of late-2021.

As of November, average NZ house prices were 13.7% off their peak and roughly equal to where they were in May 2021. Auckland is back to the levels of about January 2021 and Wellington October 2020. Canterbury is at September 2021 levels with the long overdue post-earthquake catch-up in prices starting in the June quarter of last year and still with a small extra way to run.

My best pick is that we will broadly see prices bottoming out around the middle of next year if not sooner

This will be with assistance from the common view on interest rates shifting sometime before the likely final increase in the official cash rate come April 2023. The view for the moment is that rates have a lot further to go up.

But we are receiving very solid information showing that the economy is weakening quite rapidly in response to many factors including the acceleration in the pace of monetary policy tightening. In the ANZ’s recent Business Outlook Survey for instance we have just seen business expectations of their own activity levels in the coming 12 months fall to a record low. Plans for hiring people and investing are at their worst levels since the GFC roughly.

We also have three measures in hand showing a falling away of consumer confidence, including my own monthly Spending Plans Survey. That shows that early this month a record net 43% of people planned cutting back on their spending in the next 3-6 months from a net 28% in November.

Inflation indicators have yet to fall away but they are sure to follow the collapse of leading indicators of economic activity and that means discussion will shift in a few weeks or months time to rates peaking and then coming down. When that happens buyers will re-emerge, probably led as before by first home purchasers.

Construction levels are taking a tumble

A change in views on interest rates however won’t prevent what I feel will be the biggest story for the housing sector in 2023 through to possibly 2025 – falling house construction. Stories of builder collapses alongside high financing costs have made people step back from signing up for a new property. Presales for developers have shrunk and many projects are now being put on hold. Consents have probably been issued for construction, but the chances are they will lapse.

For real estate agents the picture is looking fairly grim until maybe late in the year

Annual housing turnover is likely to keep falling from the 65,000 recently reached. The most recent peak was 100,000 in June 2021. Reduced sales, to something below 60,000, will also affect the mortgage broking sector.

Falling sales will also affect bank ability to meet sales targets, and that is where we get a second underlying market change to come along alongside an eventual change in interest rate worries. Banks have already slightly eased their lending criteria and are likely to keep doing so through 2023 as they seek to maintain profits.

Put alongside rapidly improving net migration flows and we get some big offsets developing against the weakening economy and labour market coming over 2023. The positives won’t be enough to bring any great rise in the housing market in the coming year. But they will contribute to an eventual flattening – likely mid-year but that timing subject to unknown developments as the year progresses.

All the best for 2023 and I hope everyone gets to enjoy the summer weather - when it eventually arrives.

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