Most economists expecting a 10% increase in house prices by early 2026
Have house prices already bottomed out, as forecast by bank economists? Or do they still have a further 12 months to shift downwards, as predicted by the Reserve Bank and Treasury?
This question, according to Gareth Kiernan (pictured above), chief forecaster at Infometrics, was “not a trivial one” for potential first-home buyers or property investors, as these could spell a difference between a property being worth $35,000 less or $35,000 more in a year’s time.
“Suggestions that the housing market has reached its bottom could conceivably become self-fulfilling if potential buyers decide now is the time to jump back in,” Kiernan said. “We saw the effects of herd mentality on the market at its most extreme during 2020 and 2021.
“However, FOMO [fear of missing out] is highly unlikely to be rekindled by a prediction that house prices could recover 5% over the next year.”
REINZ’s index showed that house prices rose 0.6% in June, in seasonal terms, after nine months of significant migration inflows, sparking increased speculation that the housing market could bottom out sooner than previously thought.
House sales volumes also improved in June, climbing to their highest level in 16 months. But while this relatively modest pick-up in sales was “not enough to start a rush of prospective new agents entering the industry,” the increase does suggest that “sales volumes have bottomed out above the ultra-low levels recorded in 2008/09 during the Global Financial Crisis,” Kiernan said.
Another factor contributing to the stabilisation of prices was improving demand, although the falling stock of listings through 2023 meant the number of properties available for sale has also been shrinking.
Kiernan said that perhaps the best indicator of the housing market’s prospects is how costly it is currently for new market entrants to service a mortgage.
“Weekly mortgage repayments would suck up nearly 24 hours of before-tax pay on the average wage for a 25-year mortgage on an average house with a 20% deposit – a figure that, prior to 2021, had only been exceeded briefly once in 2007,” he said.
“In other words, three out of the five days in a working week would be devoted to meeting mortgage repayments. Even with the 17% drop in house prices and 11% increase in wages since late 2021, the affordability of debt-servicing has remained eye-wateringly high as interest rates have risen rapidly.”
Against this backdrop, Kiernan said there is limited scope for house prices to bounce back significantly from current levels any time soon.
“Better demand conditions in the near-term caused by strong immigration could lead to a short-lived bounce, similar to 2009/10 when prices lifted 6.3% following a 10% decline,” Kiernan said. “But the reality is that the price buyers can pay will remain constrained by the servicing costs associated with that debt.”
With that constraint in mind, most economists predict house prices to be up by just 10% by early 2026 than their current level.
“With wages expected to rise a little faster than house prices over the same period, a small improvement in housing affordability is possible,” Kiernan said. “‘Small’ is the key word though – weekly repayments could still be equivalent to between 20 and 23 hours of the average wage. This repayment level is still at an uncomfortably high level by historical standards.”
There were two banks that were expecting, somewhat surprisingly, a nearly 30% increase in house prices from current levels by March 2026, taking prices back above their 2021 peak.
“Our calculations suggest that if the official cash rate is still at or above 4% by early 2026, the forecasts are implausible, because they imply weekly debt-servicing costs at a new record high of 26-27 hours of the average wage,” Kiernan said. “Even with an OCR of 2.5-3%, servicing costs would still be at 22-23 hours of the average wage.”
He said the high ratios indicated a seemingly permanent lift in the real cost of housing, not just during the pandemic, but throughout the last two to three decades.
“More expensive repayments point towards a likely extended period where house price growth tracks in line with inflation and below income growth,” Kiernan said. “And, perhaps most importantly, they highlight an enduring need to address the issues around land supply, planning regulations, and infrastructure that continue to limit our housing supply.
“Until those constraints are removed, any improvements in housing affordability look likely to be fleeting.”
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