'When interest rates rise, house prices will fall': Economist forecasts window of opportunity for first home buyers

Westpac's November economic forecast indicates house prices could fall in 2024.
Westpac's November economic forecast indicates house prices could fall in 2024. Photo credit: Getty.

First home buyers frustrated by skyrocketing house prices may find being forced to put their home ownership plans on hold isn't such a bad thing. 

Record-low interest rates, removal of loan-to-value ratio (LVR) restrictions, expats returning home and fewer people leaving the country due to COVID-19 have created the perfect storm for house prices to rise. 

These rises are despite rising unemployment (currently 5.3 percent), preceded by a record 12.2 percent fall in GDP.  Current REINZ and Trade Me property figures show median selling and average asking prices in Auckland are now over $1 million.  

Kiwibank is expecting pressure on the property market to continue, forecasting a 13 percent rise by mid-2021. Similarly, a Westpac economic overview for November forecasts house price inflation to reach 15 percent. Bank economists don't expect the property market to turn until mortgage rates go higher.

But when consumer price inflation eventually picks up (due to a rise in confidence and economic performance), the OCR will increase to keep inflation between 1 and 3 percent. Interest rates,  including mortgage rates, will rise, putting forces driving high house prices into reverse.

"The whole point of what the RBNZ is doing now is to drive more demand in the economy and therefore more inflation. When the job is done and inflation is on track to return to 2 percent, there is no more need to keep interest rates low," Westpac chief economist Dominick Stephens explained.

Although rising interest rates make it more expensive to borrow, they could put downward pressure on house prices.

"We're pencilling in a period of declining house prices from 2024. 

"Such long-range forecasts are subject to extreme uncertainty, so the timing is perhaps less important than the principle: when interest rates rise, house prices will fall," Stephens said in the report.

Kiwibank chief economist Jarrod Kerr expects the housing market to start cooling off in 2022, after loan-to-value (LVR) restrictions are reinstated. The Reserve Bank has indicated this is likely to be from next March.  

"Credit growth among higher risk borrowers is accelerating, and a circuit breaker was needed," Kerr said.

"We expect the rapid expansion to slowly ease into 2022, mainly as a result of LVR restrictions." 

Should I buy now or wait in case there's a big crash?

A survey carried out by REINZ in November showed over three-quarters of buyers surveyed (88 percent) had a fear of missing out as rising prices put home ownership further out of reach.  

As nooone can predict the market, property trader Graeme Fowler said the right time for first home buyers is likely to be when they're ready.  

"I personally wouldn't be trying to jump in too soon, or on the other hand, waiting for a big crash that may never happen," Fowler said.

In the meantime, first home buyers can focus on saving their deposit.

"If I was a first home buyer now, I would be doing what I could to save as much as possible and when in a position to be able to buy something, then do it," Fowler said.