The endgame is upon us

Guest post from Tony Alexander

Housing markets move in cycles, and we have been in a very strong downward part of that cycle since December last year. Average house prices around the country have fallen by 10.8% and chances are high that prices will fall another 5% or so.

Factors driving prices lower still include high levels of business and consumer pessimism, net migration outflows and discussions about a brain drain, sometimes scary stories regarding new-build costs and completion times, talk of an over-supply of townhouses in Auckland, difficulties accessing credit, high mortgage interest rates, and worries about buying then seeing prices fall further causing buyers to sit on their hands.

But as I have written here before, there is something very different about this downward leg of the housing cycle.

It is not associated with soaring worries about rising unemployment. People continue to enjoy high job security and employers are literally screaming out for staff. Whereas in the likes of the 2008-09 recession and Global Financial Crisis the quick jump in the unemployment rate from 3.4% to 6.5% took many buyers completely out of the market, this time those buyers are still there but hiding in the shadows.

There is enough evidence now emerging of some of these young buyers in particular stepping out of the shadows that I am prepared to say we have entered the endgame for the downward phase of the house price cycle. That does not mean prices stop falling. It means the speed of decline is about to slow and the scene is being set for the cyclical upturn to return — though in very muted form through 2023 initially.

The monthly survey of mortgage advisers which I run with mortgages.co.nz has just shown a net 8% are seeing more first home buyers stepping forward for advice. This is the strongest result since February 2021 and well away from the net 64% who six months ago were seeing fewer first home buyers.

This result has just been backed up by my latest monthly survey of real estate agents alongside REINZ. The report is not out yet, but my tallying of the responses shows a similarly firm net proportion of agents seeing first home buyers returning to the market.

Perhaps the strong commentary I have been delivering in recent months is having an impact!

I have been inviting young buyers to ask themselves what is most important to them. Getting the last 5% out of the price cycle or securing a home in which to raise a family when listings nationwide are double what they were a year ago and vendors have now started capitulating to the reality that they will not be able to sell for what they could have got late last year.

Is the scene being set for firm house price rises through 2023?

No. Mortgage rates will fall only slowly through the year, the brain drain will worsen for quite a few months more, the high cost of living increase will deprive some people of the funds needed to secure a property, new house supply is still rising, credit access is still tough (though improving), and people are diverting sending towards overseas travel.

But construction costs continue to rise, there is a wave of migrants becoming legally able to buy a property as their visa is changed from working to residency, some investors are anticipating a change in government bringing restoration of interest expense deductibility, and expectations for mortgage rates will generally edge lower from now on.

The endgame of this period of falling prices has begun and it will be very interesting to see when this results in listing numbers falling again. Maybe once the usual rush of fresh spring listings has been and gone.

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