ASB, Westpac predict biggest drop in house prices over next year

"Three housing nasties" behind sinking prices, economists say

ASB, Westpac predict biggest drop in house prices over next year

Two of New Zealand’s largest banks have forecasted a 20% drop in house prices over the next year – the biggest fall since the 1970s – which would bring prices back to where they were just over a year ago.

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New Zealand is currently in the midst of some of the largest drops and slowdowns in house prices since the wake of the global financial crisis and after years of being plagued by a runaway housing market. The Real Estate Institute said the number of houses sold in April fell 30% from the previous month, while Westpac reported a 1.1% drop in prices in April – now down 5% from their peaks in November.

But while price drops and supply increases are welcome news for prospective buyers, recent first-home buyers who spent big now own a property that is less valuable, and rising interest rates due to inflation could see borrowers spending more on their mortgage repayments, as a cost of living crisis also bites.

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Westpac and ASB have now both sounded the alarm about the dramatic drops in house prices over the next year, with ASB economists pointing to the “three big housing nasties,” – tighter credit conditions, higher mortgage rates, and increased supply of new housing – as the reason behind the receding prices, The Guardian reported.

“However, the bulk of the house price impact from the mortgage rate surge is yet to come,” ASB said. “About 60% of all mortgage rates will be reset over the coming 12 months.”

ASB economists predicted that interest rates could nearly double for some households, but did not expect the change to result in widespread mortgage distress or forced sales.

“But the rate shock will siphon a bunch of extra disposable income out of Kiwis’ wallets this year, hitting discretionary retail spending hard,” they said.

Michael Gordon, Westpac’s acting chief economist, told Stuff that while 20% sounded like a big drop, it would take prices back to where they were at the start of 2021. Median house prices increased 31% in the year to July 2021.

“That illustrates the ferocity of the rise in house prices during what turned out to be a brief period of super-low interest rates,” Gordon said.

Gordon also said that rising incomes and increased household savings would take the edge off a downturn.

“The slowdown we’re forecasting looks more likely to be a soft landing, rather than a crash,” he told The Guardian.