Tony Alexander August 2022

Turning of the housing cycle - upward


There’s a phrase I was using a lot at the end of last year and the first half of this year at the start of many of the articles and columns I was writing. It went like this. “Housing markets move in cycles.” That is, they go up with rising sales, rising prices, falling listings, and quickening times to sell. Then they go down with the opposite happening.

My focus was on the way in which the upward leg of the most recent cycle was ridiculously strong due to factors associated with the global pandemic. This raised the risk of a decent correction in prices as the cycle had clearly turned to its downward leg. Prices have been correcting downward at a fair clip and so far, nationwide have fallen by 9.5% in seven months.

The average monthly pace of house price decline has been 1.4% compared with an average rise of 2.1% a month from June 2020 to November 2021, and 2.7% a month during the frenzy from July 2020 to February 2021.

How long will this downward leg of the cycle run for? Or, to put it another way, when will the buyers return? This is more important than asking when the sellers once again become hesitant to sell because it is shifts in willingness and ability to buy which are the key drivers of changes in the house price cycle, not willingness to sell.

For the moment the buyers remain well back in the shadows. A net 36% of real estate agents responding in my most recent survey with REINZ have said that they are seeing fewer first home buyers. A net 60% say they are seeing fewer investors. A net 51% say fewer people are showing up at auctions and a net 47% say fewer people are attending open homes.

Only 4% of agents feel that buyers are displaying FOMO, but 69% feel that they are showing FOOP - fear of over-paying.

The market is weak, and it is easy to understand why. Fixed mortgage rates have risen by over 3% in the space of nine months whereas it took four and a half years last tightening cycle for not quite this jump in interest rates to occur.

A credit crunch is underway courtesy of the changes to LVR rules in November and implementation of changes to the Credit Contracts and Consumer Finance Act from December. Buyers are being pressed by the biggest jump in the cost of living in three decades, consumer and business confidence readings are close to record lows, the country is suffering net migration losses, property developers are collapsing and failing to get pre-sales, and there is a return to reality after the hyped FOMO-driven extra jump in prices last year from July – November.

If I were feeling lazy, I could stop writing here, perhaps with the addition of a comment along the lines of prices still having further to go – probably 5% or so after which they will flatten out. That is certainly the common view. But while I agree with the first view of prices falling another 5% or so, I disagree with the sanguine assumption that things will then settle down – and hence I’ve more to write.

Things will not flatten out when prices stop falling. Prices instead will rise. Already I can see signs that the bottom of the cycle is approaching even though the negatives definitely still dominate.

First, many of the measures in my monthly survey of real estate agents are the least negative they have been for some time. Back in February a net 72% and 79% respectively of agents said fewer people were attending auctions and open homes. As noted, the latest numbers are 51% and 47%.

In February a net 71% and 68% respectively were seeing fewer first home buyers and investors versus the latest numbers of 36% and 60%.

Things are getting less negative – but they are still very negative. The credit crunch is also still there, but it is less bad. A net 9% of mortgage advisers in a survey I run with say that they feel banks are becoming more willing to lend. A survey of property investors I run with Crockers Property Management shows a net 30% feel banks are making it tough to get credit versus 60% early this year. The proportion of bank lending which involves less than a 20% deposit has lifted from just over 5% early this year to 8.6% in May and 7.8% in June.

Views on interest rates are also shifting. Bank wholesale borrowing costs have fallen 0.5% 0.7% from peaks in June when inflation worries dominated. Now, in light of weak economic data offshore and central banks moving rates up more rapidly than anticipated, attention has shifted to risks of recession and markets are pricing in monetary policies easing before the end of 2023 in the likes of the United States, Australia, and New Zealand.

We are close to entering the endgame for the downward leg of the house price cycle. For a few months longer the negatives will dominate, including talk of the brain drain and discussions about property over-supplies in some parts of the country.

But with international food, oil, and shipping costs falling alongside rents growth in NZ slowing down, in the middle of October when the next inflation numbers appear we are likely to see the inflation rate falling. That will sharply focus people on how quickly inflation will decline and that will reinforce attention on already falling fixed mortgage interest rates.

Then there are these interesting things people will say to each other. With the stock of property listings already 104% ahead of a year earlier at the end of July and the falling of listings to a record low below 14,000 last year helping propel the late year surge in prices, people will openly wonder if perhaps the time were not right to take advantage of the high number of properties to choose from.

When that happens someone (me) is going to point out that listings are still well below average, and shortages look set to return once the buyers do.

Then we will need to add in people discussing what it means for the prices of existing houses if construction costs keep rising as they have been. The incentive will shift even more strongly back towards buying an existing property than it already has.

Then someone will remember that two months ago the Reserve Bank said it would no longer consider house prices to be unsustainable once they had fallen 15% from November peaks. The decline so far amounts to 9.5%. When we hit a 15% decline the headline somewhere will read “Reserve Bank now considers house prices to be sustainable”. When prices have gone down 15%, I expect an easing of LVR regulations to reflect this reduced risk of house price correction to stability of the financial system.

Then let’s add in the strong labour market bringing few fears of job losses and we are highly likely to see a situation where before the end of summer, the buyers come out of the shadows again to initially take advantage of tired vendors, then to generally snap up listings.

The outcome is likely to be that through 2023 as credit flows more freely, interest rates fall, the economy receives a boost from tourism and foreign students returning, a low NZ dollar and good export prices, that house prices will rise.

My expectation is that prices on average will rise between 5% and 10% next year. Barring an outbreak of foot and mouth disease decimating the economy, the incentive for previously frustrated buyers waiting in the shadows to come out and become more active will grow as each month goes by from probably one of the three months of Spring.

Go to to subscribe to my free weekly “Tony’s View” for easy-to-understand discussion of wider developments in the NZ economy, plus more on housing markets.

By Tony Alexander