This is where house prices can recover first

In the first half of this year, house prices across the country have steadily declined. It looks like that trend will continue for some time to come, as higher interest rates and weak sentiment go hand in hand with tight affordability.

But commentators expect prices to stabilize quickly — perhaps by mid-2023.

independent economist Tony Alexander said experienced real estate investors would probably have made all their “smart” purchases before then.

So where can we expect prices to rise again first?

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Nick Goodall, Corelogic’s head of research, says there are two factors likely to drive any move: affordability and demand.

He said areas where affordability wasn’t as stretched compared to incomes would have more room for prices to rise again.

At the end of the first quarter of this year, Invercargill and Gisborne had relatively low house price to household income ratios of 5.4 and 6.0 respectively.

“It is worth noting that this ratio has deteriorated by 36% in the last two years, from 4.4 in Gisborne, which is more than the NZ figure of 34.8%. In Invercargill, the ratio increased by 28.3% from 4.2.”

He said major urban areas where the ratio hadn’t significantly deteriorated would fare better from the downturn, but the higher starting point for each also had to be recognized.

“Dunedin leads this list, with affordability deteriorating by ‘just’ 23.2%, from 6.9 to 8.5, followed by Nelson at 23.6%, from 7.7 to 9.5.

“The future of any regional market will not depend solely on affordability. But since interest rates are an important factor in enabling more people to borrow larger sums of money, it will have a major impact. We also need to recognize the role of migration.”

If there was a period of negative migration – people leaving Aotearoa, New Zealand – it would probably depress regional house prices more than those in the largest cities. People tended to leave the country from all regions evenly, but migrants to New Zealand mostly came to the larger centers.

“In that regard, Christchurch will continue to appeal to a large audience due to reduced affordability pressures. The house price to income ratio in Christchurch is 6.8, up from 4.8 two years ago, well below the second best of the ‘big six’ cities – Wellington at 8.1.

“For context, Auckland has seen the ratio deteriorate by 35% over the same period, from 7.7 to 10.4.”

He said the Auckland apartment market still has growth potential as international students returned and the Airbnb market picked up as tourism increased.

ANZ economist Miles Workman said the recovery would come first in places where buyers saw the most value – “which in turn may be a function of how far prices have fallen. Mostly we see the regions where house prices are sharper. We’re seeing sharper declines now, so it’s hard to say where the dust will eventually settle. The short-term swings in this cycle are pretty crazy.”

He said that Covid-19 had made working from home more normal and that that could change the distribution of demand. Auckland’s recent construction efforts may mean that house prices have risen more slowly than they otherwise would have been.

“New Zealand has made great strides to tackle the housing shortage. We estimate that we have eroded the housing shortage by about 5,000 to 8,000 homes per quarter since the border closed.

“And much of that activity (and consented future activity) is taking place in Auckland…suggesting that Auckland’s housing supply is better positioned to meet demand than it has been in a long time.

“All else being equal, that will limit upward price pressure in the region once the cycle turns.”

He said that given the decline in housing affordability in recent years, falling prices now and only modest increases when the cycle reverses, would be a welcome development from a wealth inequality perspective.

“However, it is important to take into account recent first home buyers, who bought close to the peak and are now seeing house prices fall. That is the pity of such a volatile housing cycle.”

But property investor Steve Goodey said Auckland was historically the first region to recover from a recession and he couldn’t see that changing. “Auckland has a limited land, all the population and all the money. It won’t be long before it looks frugal again.”

Economist Benje Patterson warned that recovery was likely still a long way off.

“There have only been a few months of declines and mortgage rates have yet to play a bit at a time when household and business confidence is low. Large parts of the market are unlikely to start stabilizing at the earliest in 2023 – and that will depend on the top being found for mortgages and economic confidence starting to recover,” he said.

But he said the “one-way bet” on housing, where people only seemed to make money, was gone.

“The reality is that houses are just as expensive relative to our income, that financing and regulation will probably never be as conducive to housing as before, and attitudes are shifting with the younger generation. This shifting attitude is not a bad thing as it has been a pretty stupid waste of capital constantly raising the prices of mediocre homes instead of investing our money in things that are productive and can actually bring better incomes to the country.

“That’s not to say there won’t be markets that outperform others, such as areas where employment prospects have improved significantly or in a market with a particularly low supply and a particularly desirable place. The latter is one of the reasons why markets such as Queenstown Lakes seem to be bucking the trend for now, now that tourism has been turned back on.”