Westpac economists are expecting to see a "substantial slowing" in house price growth over the coming months.
And they believe that this will turn to "modest" house price declines in the second half of next year.
The Westpac economics team have long been particularly strong on the view that interest rates are the key driver of house prices.
And in the latest Weekly Economic Commentary, Westpac acting chief economist Michael Gordon says higher interest rates "will have major implications for the housing market".
"We have long used a ‘user cost’ approach (based on a 1984 paper, which we adapted to New Zealand settings) to explain the general trend in house prices," he says.
"The key insight is that interest rates, rather than supply-side issues, are by far the most important driver of changes in house prices. Notably, in RBNZ Governor Orr’s speech on housing last week, the analysis behind it also adopted this user cost approach.
"As mortgage rates rise, we expect to see a substantial slowing in house price growth over the coming months, turning to modest price declines by the second half of 2022.
"Even then, the recent rate of increase has been so dramatic that, on our forecasts, it could take a few years just to get house prices back to where they were at the start of this year."
Last week the Westpac economists revised their view of how high the Official Cash Rate (OCR) will go in the this current interest rate hiking cycle. They now think it will hit 3% in 2023 - which is higher than other bank economists are forecasting, although the forecasts of all the economists have been trending towards higher for longer.
Westpac's Gordon says it’s important to note that the upswing in mortgage rates "is already well advanced".
"While most forecasters – and the RBNZ’s most recent published projections back in August – suggest a peak in the cash rate of around 2%, wholesale interest rates are already consistent with a peak closer to our view of 3%. (Whether this reflects a genuinely-held belief by traders, or an overreaction in a volatile market, is irrelevant at this stage.)
"Those wholesale interest rates have in turn been reflected in the sharp rise in mortgage rates over recent weeks.
"The shorter-term fixed mortgage rates, which are generally the most popular, have risen by more than a percentage point from their lows in July.
"Consequently, even if we’re correct that the cash rate will peak at 3%, a two-year fixed mortgage rate is already closer to its peak than its trough for this cycle."
56 Comments
So they are at their peak in this cycle. When did this cycle start and when does it end?
Any sane person would not buy a house today as the vendor expectations are 1.5 millon for a 4 bed house in the regions.
Do these people know how many years it takes to save 1.5 millon dollars on an average wage for a Couple, god forbid they have any hobbies.
The whole system is based on greed and everyone wants to be rich overnight by doing as little as possible.
highly speculative
Absolutely 100%.
not really an investment class
Strongly disagree. Bitcoin is the best performing asset in history. Crypto is definitely an asset class.
very high volatility
Absolutely. This is why they are so much fun and lucrative! Cannot fathom trying to trade the share market.
Like cryptocurrencies?
Big differences between the housing bubble and cryptocurrencies. Those who speculate on crypto (leverage) long or shot are likely to get wiped out. It's been a recurring theme in 2021. With the property bubble, the ruling elite simply create more credit to protect it and keep it moving (while debasing the value of currencies). Now there's a certain irony here as Bitcoin in particular is being purchased as 'insurance' against the money printing.
The real beauty is you can short crypto with ease. Money to be made whatever direction it is going. How do I 5x short the NZ housing market?
Money to be lost too. But if people want to speculate, it is indeed beautiful and representative of a 'free market'. Indirectly, going long (diamond handed) has been a "short" on the housing bubble as it's directly related to money printing and currency manipulation.
"The whole system is based on greed and everyone wants to be rich overnight by doing as little as possible".
Exactly. And what do you get when you question such peoples choices? Aggression and anger, like a bunch of rabid dogs scrapping over a bone.
Zero consideration for anyone else.
"Wholesale interest rates are already consistent with a peak closer to our view of 3%".
This confirms what I have been saying for several days. But there are still commentators in this website who, contrary to what markets are currently indicating with great clarity, are very confident that this is not going to be the case. Maybe they are privy to some secret information, or maybe theirs might just be wishful thinking.
While swap markets are not always perfect predictors of rates directions, their pricing signals are now quite strong. Ignore them at your peril. There is the possibility that the OCR peak might not reach 3%, but also the possibility that the peak might well get over and beyond the 3% threshold.
It's hilarious looking back at Westpacs predictions....
https://www.interest.co.nz/property/104321/westpac-economists-say-after…
"When did this cycle start and when does it end?"
1981 (when global financial markets were set free and banks went berserk, creating virtually limitless liabilities) and, far later than anyone thought and far later for it not to be financially painful for some sector of our society. The better question is "Who IS going to pay for this faulty economic policy?"
there are always a number who pay far too much at the top of the market. Even in the Tulip frenzy of the 17th Century- just before the market crashed people were paying 5000 guilder for a single bulb - 5 times the price of the tulip a month before and the equivalent of the price of a house.
IT doesnt mean the market is not going to collapse- it just means there will be somebody with a lot more tears than others.
in fact to be fair the Tulip graph looks a lot like the NZ house market graph over the last 18 months
Recommend this fictional book called "tulip fever" which describes some of the madness of that time
That is meaningless as there is no context. He may be selling to invest in something better, something that goes up 100% instead of 50% over a period. Doesn't mean to say what his property is going to go down, just that the opportunity cost is too great to hold his property. Maybe he sees crypto as a better gainer? Or rockets? Or maybe he just has no need for too much property which might be the most likely reason.
The pertinent question is not whether interest rates is one of the drivers in house prices; it is what drives interest rates and what you think that scenario will be.
Retail card spending, business and consumer confidences are all down while employment rate is ironically up- does that not even scream dodgy to the economists in WestPac?
There's still much room for upward valuation.
Be quick.
Of course their forecast is necessarily made "ceteris paribus'......I see Tony Alexander gives his own forecasts on mortgage rates only a 10% chance of being right.
Globally it seems inflation is here to stay including a commodities prices upswing. Add that to a labour and energy upswing all taken together these will bake-in ongoing significant inflation.
I wouldn't count on a modest decrease in property values in the second half of next year. It's impossible to say with absolute fore-knowledge exactly what will in fact happen. High liquidity and wealth, high wages growth rates and inflation could in fact push the whole residential complex higher. The mother of all booms it seems.
Have a listen to this one Shoreman ........ https://www.youtube.com/watch?v=URdsaw59ZzA
Let's hope you and your NZ property buddies can prop up the Chinese property market, as I certainly can't.
Have a listen to the Lehman Bros. v Evergrande comments ? ............but she'll be right mate, it won't affect nuzullin' :)
Smudge02 - Yep it's all gunna crash, just like it has been gunna crash for the last 40 years !
Good luck waiting for the crash with your head buried in wishful thinking or was it buried in the sand ?
Mean while the rest of us just keep clocking up that wealth $15 mil and counting... but it's gunna crash right ?
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