housing
Ahead of this week’s expected rate hike, CoreLogic and QV analyze sales data to discover which sunny suburbs are hardest hit by the property crisis — and which are bucking the trend
When Bruce and Janet Deihl put their three-bedroom Normandale home for sale this year, they dared to dream of raking in more than $1 million. That’s what sites like OneRoof and Homes.co.nz vehemently promise them.
Instead, after weeks on the market, Ray White’s real estate agency sold the 805-square-foot property in May for what appeared to be a paltry $737,000. “We missed the boat with the market,” says Bruce Deihl remorsefully. “What we got was, I think, a little disappointing because we had come to believe it could be worth more than that. But that’s life.”
This week, the Reserve Bank is widely expected to raise its official spot interest rate by another 50 basis points (0.5 percentage points) to 2.5 percent. This increases the price the banks and other lenders pay for their money, forcing them to raise rates as well or suck the rise in OCR into their margins.
The market is forecasting further rate hikes, so for communities like Normandale this means house prices will continue to fall. Last month’s sale price may have been a disappointment to the Deihls, but it was a big gain on the $207,500 they bought it for in 2003 — and at least they sold it.
There are other listed properties in Normandale that are stubbornly unsold, or have been taken off the market by frustrated sellers as it becomes increasingly difficult to sell. The same goes for the length of the Upper and Lower Hutt Valleys. David Nagel, chief executive of QV, predicts that home values in some areas will fall by 20 percent.
Why are there such huge disparities between communities like Normandale, where home values have fallen an unprecedented 10 percent this year, according to CoreLogic, and others like Reefton, Patea, Hahei and Mangawhai Heads, which are still rising at double digits?
“Maybe the animal spirits have turned around really quickly too, as listings have risen and price power has shifted to buyers.”
– Kelvin Davidson, CoreLogic
The biggest increase this year, in the six months since prices peaked just before Christmas, is a small community in northern Waikato. Meremere is better known for its disused power station, its drag bridge and a few tired houses visible from National Highway 1 as motorists speed towards the Bombay Hills and Auckland.
But according to CoreLogic, home values are up a whopping 30.2 percent.
Kelvin Davidson, chief real estate economist at CoreLogic, says it’s difficult to discern trends at the granular suburban level, but it’s clear that parts of Auckland and Upper and Lower Hutt have been the hardest hit so far.
“An obvious factor could be that they had big ups and downs, perhaps with ‘exuberance’ pushing prices above fundamentals,” he suggests. “Affordability has been stretched, so that now set the stage for bigger falls. To be fair, a lot of other parts of New Zealand have been stretched as well, so I expect the falls to continue to spread.
“I tend to agree with the Reserve Bank — maybe a 12 to 15 percent drop over a 12-month period, or something. That was broadly the GFC’s experience as well.”
The GFC showed that it could take several years for prices to recover to their peak. The pre-GFC peak of 2007 was not regained until 2012. “So then it was a ‘bathtub’ – fall, long flat, then eventual rise. Mortgage rates then fell, while they are now rising. So I expect a recovery to take just as long this time.”
The ups and downs of the home value of 2022
“The biggest cause for me is definitely the credit environment – tighter Reserve Bank official regulations, tighter internal bank policies and higher mortgage rates. Perhaps the animalistic mind has turned really fast too, as quotes have risen and price power has shifted to buyers.”
At QV, Nagel gave an internal presentation to the organization, questioning predictions that the downturn will be short-lived. He argues that those predictions are simply a reaction to the fact that some banks have cut some mortgage rates this month.
“Returning expats have helped over the past two years, but with many leaving the country, the property market is vulnerable.”
– David Nagel, QV
“Most predict that the Reserve Bank will add another 50 points to the OCR this week,” said Nagel. “There will probably be another 100 point hike before we get on top of inflation. So the medium term trend is for mortgage rates to rise. This will have a negative effect on house prices.”
Nagel warns of the impact of an outflow of young workers, which would also reduce demand from the rental market.
“What will be equally concerning is the much-discussed ‘brain drain’ to Aussie and beyond, as our youth seek higher wages, and life experience that hasn’t had the usual travel options since 2019,” he says. “While not normally homeowners, these people are renters, so landlords will be watching closely to see the effects this likely exodus has on rents and vacancy, especially with cost of ownership rising due to increases in mortgage and interest deductions.”
House price change in six months from the December 2021 peak ($)
To some extent that will be countered by inbound overseas workers, but that is not yet enough to balance the exodus.
“With the borders barely open to migrants, we are currently struggling to break the net profit of migration,” says Nagel. “This is a big lever in home values, with much of the previous cycle being driven by very high migration, needing the 70-80,000 net profit somewhere to live. Returning expatriates have helped over the past two years, but now many are leaving the country “The real estate market is vulnerable.”
Nagel agrees that the overall decline will vary from community to community, depending on how high their prices had risen before and other local economic factors. “We will probably see corrections of up to 20 percent in extreme cases, but more likely 10 to 12 percent for the majority of New Zealand.”
“Since we’ve gained nearly 30 percent a year in some locations for the past 18 to 24 months, plus we’re currently close to full employment, it won’t cause havoc for the majority of homeowners, but it could put pressure on those who are on the run.” bought the peak.”
Sun setting in some suburbs
No one watches the market more closely than the brokers who make their living from it. Alice Pearson works with The Professionals in the Hutt Valley; she sells properties in Normandale and says the agency has had some ups and downs.
She struggles to understand why values have fallen so much in Normandale, one of a series of hilly suburbs overlooking the Hutt Valley. “Most people who move to the western hills stay in the western hills,” she says, “so what we’ve seen is probably a result of less attrition. Some young families will move to the area, but it’s more common that you’ll see people moving within those areas.”
She describes a three-bedroom house she had on the market, on the other side of Normandale from the Deihls’ property. “It was a real struggle to sell for no reason at all. It’s a beautiful house and last year it probably would have sold in two weeks.”
She has a number of homes that have been sold, while nearby homes are not getting any offers. “There’s no rhyme or reason – they’re just around the corner from each other. Very different houses, but such good locations.”
“The prices were so high last year, so it was a hard landing. It wasn’t sustainable, it would eventually happen. But of course it’s hard when you only have one or two months off to hit that high price.”
Prices as low as those paid for the Deihls’ property are “unusual,” she says.
Bruce Deihl remains stunned at the speed of the real estate crisis, but philosophically. Normandale is a suburb that seems to have all the basics.
He and his wife would chat to Benedict’s Cafe, in neighboring Maungaraki, for cake and coffee. “We used to go for walks most nights and it was really good for exercise,” he says. “Hiking on the hills is really good. Gets the heart rate going.
“The house gets the morning sun very well. Our neighbors were nice. Yes. It was a pretty good community. So I just don’t know why it would be lower now than in other areas.”