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Annual house price growth could be in negative territory by next year - Westpac report

Annual house price growth could be in negative territory by next year - Westpac report

Westpac's acting chief economist believes small rises in interest rates could have a significant effect on house prices.

In Westpac's latest Home Truths newsletter, the bank's acting chief economist Michael Gordon wrote "a little could go a long way when it comes to interest rate hikes."

"To the extent that loan-to-value limits and the current tax changes have cooled investor demand, the evidence to date suggests that owner-occupiers have been willing to step into the breach and and pay these kinds of prices," he said.

"That could change once mortgage rates - in particular the popular one and two year fixed rates - start to rise from their lows, as the prospect of OCR hikes comes onto the horizon.

"We're now expecting the Reserve Bank to increase the OCR by 25 basis points in August, with a further series of hikes over the coming years - but we expect the pace to be gradual.

"While we haven't had an OCR increase since 2014, there's a more recent example that could be instructive.

"Fixed term mortgage rates rose between late 2016 and early 2017 in response to global interest rate trends, with the one and two year rates rising by 30-40 basis points.

"House price growth slowed markedly at the time, from around 15% a year in late 2016 to just 4% by the end of 2017.

"Auckland house prices even fell slightly," he said.

Westpac is forecasting that house price growth will continue to slow over the next few months but the annual rate of price growth is likely to still be around 19% by the end of this year.

"By the second half of 2022 we expect this to tip over into a period of modest prices declines, as interest rates return to more normal levels," Gordon said.

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53 Comments

16
up

This is interesting coming from Michael Gordon, he is usually more bullish on the housing market.

If you plan to sell, get in quick.

haha nice try, still not selling. prices will stay stable and up, interest rates will go up, and those who don't own a home will be the ones suffering at the end of the day. NZ government has made the perfect storm and noone will give up their safe haven assets in NZ. Why would they? It's the safest country in the world, with great lifestyle blocks, solid education, one of the best places to live and get a passport.

Basically you are making those who own more, to have more. And those who have less, to continue to have less. It's a shame, but it is what it is.

19
up

You lost me at solid education

That's debatable. If all you've seen is NZ education, then there will always be complaints. But if you've actually experience education in different parts of the world, you will thank god you are in NZ.

Happy for you to go to a place like China to try their education system out. Maybe you'll enjoy it ;)

15
up

I've spent some time in a SE Asian school. Much much better learning outcomes than our schools. Their culture values education, so students are more motivated and teachers earn high salaries. Speaking from experience, they are years ahead of us at high school level.

They also have a different learning style than western countries. SEA schools focus on discipline, memorization, and learning drills. Not as much focused on extra curriculars and building a childs curiousity. Western countries are a big more relax on the discipline/learning side, and more so focuses on you interacting with other students and participation in group activities involving team work, collaboration, and communication. Depends what learning style you want for your kids, all very subjective to the person.

Damn what a shame we're* stuck between the choice of having kids be able to read and write or having them be curious but functionally illiterate.

*apparently.

7jai
Agree with you.
In my early years I was a teacher and was invited on an all expense trip to observe the Japanese education system. They had a considerable focus on rote learning which has limited practical value outside of exams.
My takeaway was that the New Zealand system was far better as it develops both inquiry and life-long learning skills.
I attribute this to our success of the America's Cup in which sailing ability is just one part. Incredible that in the previous America's Cup a significant factor in our win over Oracle was our computer programming - and Oracle is a significant global computing technology corporation which Ellison gave their full support to his challenge. In the last Cup we were leaders in computer-based boat design and technology.
Unfortunately too many international education comparisons are based heavily on rote learning.

"Our?" You really drank the Kool-Ade. America's Cup is a rich boy's game that has only tentative links to a country.

I disagree, students at the school I was at spent loads of time doing art, cooking and music with a focus on local traditions. PE every day, an hour for lunch and 2 breaks a day, similar to here. Teachers and students have a great relationship and genuinely care for eachother like a family. It genuinely is a wholesome vibe. I spent time in more than one school, travelling and teaching English in rural Thailand. It was an amazing experience.

Maybe if we paid our teachers better, we'd get better teachers?? Goodness knows how you would exist in Auckland or Wellington on a school teacher's wages.......

But we also need fewer pupils per class - and more parents who take their children's education seriously.

TTP

SE Asia is a big place and there's a *massive* difference in the quality of the education between an international school in say Bangkok or KL, and a village school in a part of the region where students are the children of (invariably poor) rice farmers and the school is poorly resourced. I spent several years at the whiteboard in a prestigious Bangkok international school which may stand up against many NZ schools, your average school in Thailand produces robots who soon realise that all they need to do is regurgitate what they learned in exams, but who ultimately have almost zero critical thinking skills and little ability to think for themselves or solve problems. If I had kids, I'd never send them to school in SE Asia.

Double post bug...

I have the same issues too!

Fair point. Our education quality isn't bad.
We produce some good talent in the hard sciences, finance and engineering; the problem lies in the little consideration employers and researchers within these streams get in economic policy, limiting the career potential for bright minds and entrepreneurs.

I did teacher's college in NZ and the quality and methodologies were so outdated and uninspiring. It's only going to get worse with the low pay and high cost of living attracting poor quality teachers. Fortunately I quickly moved out of that industry.

My sister moved to the US and the quality of state education has advanced her children's vocabularies, social skills and general knowledge immeasurably.

The so-called improvements in teacher methods seem to have moved the dial backwards in NZ.

A solid education was where brick like textbooks were thrown at kids heads with more braincells lost than that in rugby. There were a lot who missed out on literacy and stem skills back then (along with the dropping of trades training) which meant there was and still is a high need for community education in older generations.

Nice REINZ ad.

I agree, property prices will stabilise for a year or two and then begin to climb as we reopen our boarders and start to grow the population again.

12
up

The mass immigration bubble has burst. Kiwis don't want it or need it.

I guess you're complete oblivious to the labour shortage we are currently facing?

I strongly suggest you read Briar Lipson's, "New Zealand's Education Delusion [...]". NZ's education system is anything but solid.

I suggest you read Briar Lipson's, "New Zealand's Education Delusion [...]". NZ's education system is anything but solid.

another single factor taken out of context:

"House price growth slowed markedly at the time, from around 15% a year in late 2016 to just 4% by the end of 2017.

This move was coupled with two main factors
1: Chinese money flood, which came to an end in 2017
2: rezoning of Auckland 30 year plan, which happened in 2016

RCD
Agree with your sentiment, it was not only interest rate rises.
You can add a third important factor to that: to that tightening of LVR restrictions in October 2016.

People will knuckle down and pay off their loans. House prices may come down a bit but the real losers will be businesses as a lot of discretionary spending is about to exit the economy.

Exactly - house prices won't go down unless there are forced sellers. Given that banks test mortgage serviceability at much higher rates than they are currently offering I can't see that happening. However every $ extra going into the mortgage is a $ less to spend on discretionary stuff, so the raising rates will choke off the economy pretty quickly. Last time the RBNZ raised rates they had to quickly retreat. Sad state of play is that the NZ economy needs rising house prices to feed itself...

10
up

Even though banks test at 6-7% (and presumably did test at a much higher rate a decade ago), that's only important when you apply for a mortgage. Once you've got it, you can expand your lifestyle and spend every cent you earn (or more). All fun and games as long as you have a steady job and interest rates are going down. I've mentioned my coworker a couple of times - she took out a mortgage more than a decade ago and she has zero savings, often runs into negative by the end of the month (I know because she complains about it). She must have been stress-tested at around 10% back then, but can't always pay her mortgage at 2.2%.

Yeah, I believe that's the case for many people. Because our housing market is so hot. The housing value on paper encourages people to spend like there is no tomorrow without worrying about paying off their debt, cause why paying off your debt when you can just buy another one when you can use your equity? Worst scenario I can sell my house and use the capital gain to pay off some of my debt? Right? It all looks good until you have negative equity... Interest rate is going up, can't sell the house cause you don't want to make a loss and get into more debt...

..another one who thinks NZ is diffrunt. High prices are in a bubble along with other assets. Bubbles pop. Get ready for it.

I am, but I don't think it will happen. Rates will go up a bit, then the economy will tank so rates will come back down a bit. There is too much debt in society for anything much else to happen in my view - and as usual it won't be those that hold the debt that will suffer (although some will of course).

If things get tough for people, hanging on to their house will be the main priority - people don't sell houses in a bad market unless they're forced to.

Maybe home owners will suck it up, but you've forgotten Labour's War on Landlords. Higher interest rates + Non deductibility of interest expenses + Higher Income Tax Rates + Ringfencing of Negative Gearing = the perfect storm for increasing numbers of forced sales of rental properties.

It's a good thing. The issue we have right now is because housing market is so hot, lots of people and investors using their existing property equity to buy more houses with less intention to pay off their debts. By cooling off the property market and causing a bit negative equity, that will give people time to pay off their debts instead of encouraging them to pass their debts to others, which causing more debts.

People who learn science would know what a sine wave is..
Is natural. And no one can win from nature.

Change is part of life and change is coming. It will hit some hard but will be good for some. So it's natural.

Nature doesn't let you create something out of thin air*, fiat does.

*(except for some virtual particles that annihilate each other immediately)

All sounds business as usual to me. Small rises, that by the way we have not even started having as yet are going to do nothing for years. House prices are still increasing to the end of summer next year because those forces are already in play. There is a huge lag here and even more people will be taking out longer fixed term mortgages at the current low rates. House price rises will flatten out at best, the stage is already set.

People forget that less than 2 years ago, our interest rates were around 4-5% and the housing prices were still hot prior to COVID. If at that time the house prices were at all time highs, with a 4-5% interest rate, it's really naive to think that a few basis points move up will shake out the market and assume every mortgage holder cannot service their debt. There will be some who will be shook out, but those are the ones that shouldn't be carrying such a high debt anyways.

For those who can service it, what it means is people will simply buckle down, spend less money on things like smashed avo and a flat white that costs almost $20 NZD. They will also spend less on recreational spending in malls, technology, clothes etc. The economy will be the one hurting at the end, which then impacts the lower wage earners who are the ones trying to afford a home and still can't afford one.

If you want to blame someone/something, I would blame this incompetent government when it comes to basic economics. They move the interest rate like switching lanes on a highway. If they had taken a softer approach (knowing well that NZ had the advantage of having our borders closed in the very beginning), we wouldn't need to have RECORD low interest rates. What this tells me again is that the governments and the banks ability to forecast scenarios is completely off the mark. They clearly don't know what they are doing, and it's scary having someone driving the car who doesn't know how to drive.

think of banks execs as pro race car drivers...paid to go as fast as possible but not responsible for the costs of crashing a car

it's really naive to think that a few basis points move up will shake out the market and assume every mortgage holder cannot service their debt

Straw man argument. You don't need every mortgage holder unable to service debt, you merely need some unable to or incentivised (out of greed or fear, doesn't matter) to move money elsewhere. Why would this happen?

  • A percentage increase of interest on a bigger debt number is a bigger amount of debt, with inability to offset interest against taxable income
  • Money in deposit accounts becomes more appealing with higher rates and lower risk
  • Behaviourally, greed/FOMO drivers can turn from panic buying to panic selling
  • It's no secret that there's a giant issue with price relative to quality (from the quality of homes to the neighbourhoods, amenities and infrastructure) and to incomes, relative to these variables in other OECD countries

The government doesn’t set interest rates.

This is something that people never seem to understand or bother learning. This housing bubble is far more to do the with the RBNZ than the government and the same thing would have happened regardless of who was in government.

.... someone help me out here , but the headline alludes to " negative growth " .... isn't that a euphemism for " falling " ?

OMG no ! .... house prices going down in Godzone .... it's the end of the economy as we know it .... teeee heeeee.....

.....this is only transitory of course.

Its been a golden run for tax free appreciation but all the tailwinds have become headwinds. No one should be surprised that a return to more normal debt pricing and cessation of printing would have a impact of debt based assets (aka real estate). Commercial yields at sale of 3% are a thing of the past, and in fact the investors stand to loose millions on commercial purchased at this yield level.

"Westpac says that rising interest rate will push house price down"

Westpac is correct but only if their is meaningfull rise and not just 0.25% and than flat Mr Watson.

If you're that worried about the rates going up, fix longer term now at the lower rates. If everyone did that, we can forget any talk of prices dropping for years to come.

Prices are set by the transactions occurring, as opposed to those not occurring.

Given their track record, why would anyone listen to Westpac?

Oh house prices only go up if rates are low?

2002 to 2007 House prices doubled with continuous rate increases that reached 8.5 percent. It's how much credit the banks create which is the bigger factor.

Ah yes, the old 'prices will flatten and stabilize' chestnut from the status quo seeking property owners.
I regret to inform you that in 30 years of looking at price charts of booming assets from all periods going back 400 years, I never saw one that did that, except where corrupt states pegged the value of a market to an external asset, and I know the NZ govmt doesnt have 1.3 trillion dollars spare to buy up the stock. The market may spike another 40% from here in a continued blow off top (or maybe not) but just like all overdone speculative frenzies, will crash by at least 70% just as surely as a crypto.

Ah yes, the old 'prices will flatten and stabilize' chestnut from the status quo seeking property owners.
I regret to inform you that in 30 years of looking at price charts of booming assets from all periods going back 400 years, I never saw one that did that, except where corrupt states pegged the value of a market to an external asset, and I know the NZ govmt doesnt have 1.3 trillion dollars spare to buy up the stock. The market may spike another 40% from here in a continued blow off top (or maybe not) but just like all overdone speculative frenzies, will crash by at least 70% just as surely as a crypto.

Ah yes, the old 'prices will flatten and stabilize' chestnut from the status quo seeking property owners.
I regret to inform you that in 30 years of looking at price charts of booming assets from all periods going back 400 years, I never saw one that did that, except where corrupt states pegged the value of a market to an external asset, and I know the NZ govmt doesnt have 1.3 trillion dollars spare to buy up the stock. The market may spike another 40% from here in a continued blow off top (or maybe not) but just like all overdone speculative frenzies, will crash by at least 70% just as surely as a crypto.