INSIGHTS

After falling for the past 18 months, it looks like the housing market has found a bottom.

That’ll be a great comfort to many homeowners, while it will also boost confidence across the economy.

At the same time, it doesn’t mean prices are set to take off again anytime soon.

The Real Estate Institute’s national house price index peaked in November 2021, and it’s fallen 18.1 per cent since then.

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That’s the biggest fall in nominal prices in history, while it’s the largest inflation-adjusted decline since the late 1970s.

However, let’s not forget how much price rose during the low interest rate era of the pandemic. In the two years leading up to the November 2021 peak, national prices surged 47.5 per cent.

During the 30 years before that, house prices increased by an average of 5.9 per cent each year, so those moves during the pandemic were well above the norm.

Even after that sizeable decline, prices are only back at January 2021 levels and are still some 20 per cent higher than where they were pre-COVID.

Residential property is hardly a bargain after the falls. It’s simply less overvalued than it was a year or two ago.

The latest rental yield report from the Real Estate Institute has annual rental yields at 2.9 per cent for Auckland, 3.3 per cent in the Waikato and 3.5 per cent in the Bay of Plenty.

Yields have improved from a year earlier but they’re still hard to get excited about, especially when you consider those estimates are before costs.

We’ve also got the prospect of a slower economy and rising unemployment to contend with.

The Reserve Bank has unemployment rising to 5.1 per cent by this time next year. That’s a big increase from today’s 3.4 per cent, and it would limit the extent of a rebound in the housing market.

Meanwhile, mortgage rates are at the highest levels since 2008.

While they might not be going up any further from here, they aren’t necessarily headed significantly lower anytime soon either.

Interest rates will fall as we bring inflation under control, but they could settle higher than many are hoping.

When it's not trying to speed up or slow down the economy, the Reserve Bank believes a neutral Official Cash Rate (OCR) is about two per cent.

That matches its long-term inflation target, so in real terms (which means inflation-adjusted) it sees that neutral OCR as zero.

Looking out over the next few years, this theoretical neutral OCR is probably closer to three per cent, because it’ll take some time to get inflation back to target.

Over the last several years, the one-year mortgage rate has typically been about 2.5 per cent higher than the OCR.

So if you’re wondering what mortgage rates will be when they go back to “normal”, 5.0 per cent is probably about right, give or take.

Not as low as you were hoping, is it.

There’s also the small matter of the election, which might keep some prospective homeowners and investors on the sidelines for now.

One comforting point is that we might be further ahead of the curve this time around, with a lot of heat having come out of the market already.

Back in the GFC-era, house prices keep rising right up until the end of 2007. They peaked just as the economy fell into recession, and keep falling through most of the contraction before stabilising in early 2009.

If the roughest patch for the economy is still ahead, at least the housing market has got in early and slumped by almost 20 per cent in advance.

With a bit of luck, a lot of the exuberance has been washed out already.

Homeowners shouldn’t count on the big house price gains from a few years ago returning, but the downturn looks to be behind us and prices should be much more stable from here.