BNZ economists expect price growth to soften in 2022 and 2023, but the longer inflation remains at current elevated levels the greater the chance that the housing market will be forced into a major correction.
They have observed that:
- Population growth has weakened considerably
- House prices are simply becoming beyond reach
- Both the Reserve Bank and Government are on a mission to remove overheating in the sector
- Interest rates are likely to start drifting higher
- It is very hard to justify current housing valuations on the basis of current prospective rental returns.
And ask does it really make sense that:
- The value of the housing stock has risen six fold since the beginning of 1990?
- That prices have doubled in the last eight years?
- That prices are up a third since the outbreak of COVID?
Demand is expected to fade, with annual net migration inflows falling to around 7,000, from a peak over 90,000. New Zealand’s annual population growth has fallen from 2.4% to just 0.7%.
At the same time, houses are simply unaffordable for some, with the price of an average house now over 11 times an individual’s average earnings.
Investor demand must also be seriously impacted by reduced returns on investment and the imposition of high capital gains tax on short-held property.
At the same time, housing supply is surging. In the year ended April 42,848 consents were issued for new dwelling units. On a per capita basis this is now surpassing the 2004 building boom, with no sign this is coming to an end.
Putting this together, the BNZ’s economists expect house price inflation to drop to about 2.0% per annum over 2022 and 2023. They caution that course of the housing market over the next few years may be a harsh reminder to some that economic and financial cycles are not a one way bet. While they are not predicting a price slump, they are not ruling one out.