Mark Lister, 18 March 2022

Cracks are appearing in the housing market, adding another headwind to the economic picture for the rest of the year.

A major decline in prices is unlikely, as these are rare outside of recessions. However, late 2021 is increasingly looking like it was as good as it gets for the housing market this cycle.

Auckland house prices have fallen for three consecutive months, with the Real Estate Institute’s house price index 5.5 per cent below its November peak. Prices have been more stable across the rest of the country, although the signs of a slowdown are still evident.

Sales volumes have fallen more sharply. All regions have experienced a decrease compared to a year ago, with nationwide volumes (excluding Auckland) falling to the lowest levels since February 2011.

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The median number of "days to sell" increased five days to 42 in February, which is 11 days higher than a year ago. Inventory levels increased right across the country, for the second consecutive month, with all but two regions (Gisborne and the West Coast) seeing an annual rise.

Lower sales volumes, an increase in unsold stock and a rising number of days to sell are all reliable indicators that house prices will slip further in the months ahead.

That wouldn’t be a huge surprise, with most forecasters already predicting a slowdown. The Reserve Bank expects a steady decline into 2024, ANZ is picking a seven per cent fall this year, and Westpac is suggesting we’ll see a ten per cent decline over the next two years.

The prospect of double-digit falls might sound dramatic, but when you consider that house prices are still 43 per cent above pre-pandemic levels (at the end of 2019), a ten per cent decline would be nothing more than a blip on a chart.

Harsher lending rules in the wake of the Credit Contracts and Consumer Finance Act (CCCFA) have been a factor, but I think it’s plain old interest rates that are the elephant in the room.

The one-year mortgage rate fell to 2.2 per cent in June last year, and today it's increased to 4.0 percent, the highest since early 2019.

For a homeowner with a $600,000 mortgage, the difference between those two rates makes for a weekly increase of $134, as mortgage payments rise from $526 to $660.

That’s a hefty increase, and it will add to the pressures households are already facing because of higher fuel costs, food prices, insurance, and everything else.

There’s more to come too. Based on what the Reserve Bank has in mind for the Official Cash Rate, mortgage rates will be above five this time next year, and heading toward six.

Prospective homeowners will also feel the pinch. The amount banks are willing to lend (based on a fixed level of income) progressively declines as interest rates rise. This means many people will enter the market with reduced firepower, which could crimp demand and further weigh on prices.

Higher interest rates and a slower property market will be felt across the broader economy. When house prices are rising, consumers feel more confident. They are much more inclined to eat out, upgrade the car, or renovate the kitchen.

When prices are stagnant or falling, people feel less wealthy, and they become a lot more cautious in how they behave.

Throw in a big dose of belt-tightening because of higher inflation and rising interest rates, and you have the classic recipe for an economic slowdown.

This is going to be an important theme over the balance of 2022, and I suspect many people don’t quite appreciate the magnitude of the increases we’re seeing in mortgage rates.

A 2-3 per cent rise wouldn’t have been a big deal in the past, when interest rates were already 5-6 per cent. However, when the starting point is only two or three to begin with, it’s a doubling in the price of money.

That’s unlikely to come and go without a few side effects along the way.

This article was also published in the New Zealand Herald under the title 'Mark Lister: A weaker housing market will take its toll'