New Zealand's house prices to fall more than expected this year

BENGALURU Reuters - New Zealand's house prices are forecast to fall more than previously thought this year, and next with a peak to trough slump of 18% as aggressive interest rate hikes weaken an already slowing housing market, a poll found.

The average house prices in the country went up by more than 40% at the peak of the epidemic before reaching a peak in November last year at levels that the Reserve Bank of New Zealand RBNZ said were unsustainable.

The RBNZ has aggressively hiked the cash rate and mortgage rates followed suit, but prices have retreated sharply, but are not enough to solve the affordability crisis that has left many potential homebuyers renting.

The average home price is expected to decline by 11.5% this year and 6.0% in 2023, according to a Nov. 9 -- 23 Reuters survey of 12 property analysts.

The estimates showed a slightly deeper decline than the 10.0% and 5.0% fall predicted in a September poll.

It would be a small fall compared to the 250% rise in New Zealand house prices since 1998, almost four times the average increase across OECD countries. In the last seven years alone, house prices have doubled.

Sharon Zollner, chief economist at ANZ, said the fall has been very orderly so far. Even a 20% fall could be considered a soft landing. We are not seeing any evidence to suggest that this is happening en masse, and we are not seeing any evidence to suggest that a hard landing would require an employment shock and forced sales. Asked how much average house prices would fall from peak to trough, analysts who answered an additional question gave a median estimate of 18%, with forecasts in a 14% -- 23% range.

This sounds drastic in percentage change terms but it's still a partial unwinding of the COVID period run-up, Zollner said.

The RBNZ expects house prices to fall by 20% from their peak a year ago, but some respondents said more was needed to make housing affordable.

Infometrics and Macquarie Bank said average house prices would have to fall by 33% -- 38% - almost the amount they fell around the time of the oil shock of 1973 to make housing affordable.

Things are moving in the right direction, but there is still a four-day camel trek away from being anywhere near affordable. Jarrod Kerr, chief economist at Kiwibank, said a lot needs to be done to balance the housing market here with a terrible undersupply of houses.

While lower house prices would improve affordability, it would be bad for recent homebuyers who would have to face a decline in their capital and higher repayments as interest rates rise.

Since October last year, the overnight cash rate has been boosted by 400 basis points to 4.25% and now is expected to peak at 5.5%, according to the RBNZ, which explicitly considers house prices in its policy deliberations.

Mortgage rates have gone up everywhere, but they are likely to be felt more acutely in countries like New Zealand, Australia and Canada where more home loans are issued on floating rates.