Faint glimmer of hope but train still in the tunnel

ASB has revised its house price prediction to a total fall of 25%. That’s a sizable price fall, and in inflation-adjusted terms it is nearly as large as the 1974-1980 slump.

This comes after ASB’s Housing Confidence Survey to the end of October, released on Friday, showed the housing market moved out of the red, thanks largely to Aucklanders.

The latest confidence survey results suggest people are seeing a faint glimmer of light at the end of the tunnel after a year’s worth of house price declines. The ‘is it a good or bad time to buy a house” responses swung back – just – in “good territory because of a bout of optimism from Aucklanders.

Price expectations moved up fractionally though remain distinctly negative. And the large group of people expecting interest rates will rise did get a bit smaller, the survey results show.

There is, however, the possibility that a train lurks. The survey results were taken just before the Reserve Bank put on an express service for the Official Cash Rate (OCR), lifting it by 75 basis points in November and talking even tougher on inflation.

Also house sales and price data from the REINZ showed accelerated deterioration, with prices now down 14% overall. House sales have fallen markedly in recent months and, in seasonally-adjusted terms, are the lowest since 2008 (putting aside the 2020 lockdown pause). We have just revised our house price to a total fall of 25%.

There are scenarios under which the price fall may not be that large. Immigration is potentially picking up faster than has been anticipated. And if people start to heed the RBNZ’s message to spend cautiously, the OCR might not need to hit 5.5% to get inflation under control sufficiently quickly. For the time being, however, the RBNZ looks like it is still going to have the throttle wide open on the OCR Express.

Price expectations: stable gloom

The results for the three months to October were surprisingly steady (net -30%) on the three months to July (net -31%).

Although price expectations are distinctly negative, they haven’t hit the depths of the 2008-09 Global Financial Crisisperiod despite prices already falling by more over the past year than they did back then.

Respondents in the South Island, where prices have held up much better, are less downbeat than Aucklanders and those in the rest of the North Island.

With the RBNZ more recently amping up its views on where interest rates will go, price expectations could yet edge lower. And prices themselves look like they are starting to fall at a faster pace, but at some point, respondents will start to see light at the end of the tunnel.

Once the RBNZ stops lifting interest rates, people will have a lot more certainty about one of the key risks hanging over people’s heads: just how high will mortgage rates go?

Buying sentiment: the only way is up?

Amidst the recent doom and gloom, respondents are increasingly less downbeat on whether now is a good time to buy a house. On a net basis, 1% of respondents think now is a good time to buy. In contrast, in the three months to January a net 28% thought it was a bad time to buy, which set a new record in the survey’s 25-year history.

The optimism is, however, solely confined to Auckland at net +9%. The rest of the North Island is technically on the ‘bad’ side of the ledger, with the South Island at net -6%.

The good/bad time to buy responses are influenced to some extent by the affordability of buying a house.

With house prices down considerably in some parts of the country and incomes starting to get boosted by strong wage growth, required minimum deposits are a smaller share of income. That puts housing more within reach from that perspective, particularly if that relativity gets sustained.

Interestingly, first-home buyers’ share of new mortgage borrowing, at 20%, has crept up marginally over the past year. But rising interest rates are reducing purchasers’ borrowing capacity during the current tightening cycle, which respondents are also aware of.

Rate expectations: still high

Interest rate expectations remain high at a net 69% of respondents expecting mortgage rates will lift over the coming 12 months. That result is down slightly from net 81% in the preceding six months, driven mainly by a smaller proportion of people expecting interest rate increases.

Only 4% of respondents expect rates to fall, little changed since early 2021.

We do expect the OCR will move higher in 2023, potentially to a peak of 5.5% from the current 4.25%. That outcome is largely priced into wholesale interest rates, but mortgage rates are likely to still move higher – particularly the floating and short-dated terms. But mortgage rates could well remain around 6-7% for several years, higher than people have been accustomed to for most of time since the Global Financial Crisis.

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