The outlook for house prices once COVID-19 restrictions ease

Experts don't expect house price growth to reach the same heights as last year.
Experts don't expect house price growth to reach the same heights as last year. Photo credit: GettyImages.

House prices have grown exponentially over the last year, making home ownership an impossible target for many Kiwis.

Although an initial "bounce" in activity coming out of COVID-19 restrictions is expected, it's unlikely house prices will continue to grow at the same rate, experts say.

From April 2019 to April 2020, national house prices grew by an average of 0.5 percent per month, CoreLogic figures show.

From May to September 2020, after the first nationwide level 4 lockdown ended, monthly house price growth averaged 0.2 percent. From October 2020 to May 2021, monthly average growth was 2.3 percent.

Current figures show the national average house price in August 2021 was $937,148 -  $199,294 higher than in August 2020 ($737,854).  

Asked whether this same level of growth is sustainable over the coming year, CoreLogic chief property economist Kelvin Davidson told Newshub "this time is different".

More recently, figures over the last three months show monthly growth dropped below 2 percent.

"Affordability is much worse than it was prior to 2020’s lockdown: we now have rising mortgage rates (not falling) and there's almost no chance that LVRs will be relaxed like last time," Davidson said.

Coming out of the nationwide lockdown in April 2020, interest rates were at all-time lows. In May, banks were offering fixed interest rates from 2.69 percent. Loan-to-value ratio (LVR) restrictions restricting low deposit lending were temporarily removed for 12 months.

Now in September 2021, the housing market is entering a different phase. Interest rates are widely expected to start rising from October 6. Government housing measures introduced on March 1 are aimed at curbing property speculation. The Reserve Bank is proposing tighter LVR restrictions, and a debt-to-income (DTI) restriction, in a bid to reduce risky lending.

When current COVID-19 alert level restrictions ease, CoreLogic anticipates a "bit of bounce" in the housing market as pent-up demand is released.  

Looking six to nine months' ahead, Davidson anticipates a market slowdown, where sales volumes - and price growth - slows.

"Any house price growth after this lockdown is almost certain to be less than last time," Davidson added.

Infometrics principal economist Brad Olsen also expects a slowdown in house price growth. Slower population growth, Government and Reserve Bank measures, higher building activity and expectations of higher interest rates are all contributing factors.

But with housing stock at record low levels in August, prices could stay higher in the short-term. Banks hadn't indicated any change in households defaulting on mortgage payments that might bring forced sales to the market.

"The pent-up demand in housing could well see a brief burst of activity once property operations resume," Olsen said.

In its August 2021 Monetary Policy Statement, the Reserve Bank acknowledged house prices had "increased rapidly" over the past year.  House prices were "above their sustainable level", increasing the risk of a correction as supply increases. 

Its medium-term forecast shows a slight fall in annual house price growth, from 26.4 percent in 2021 to 7.9 percent in 2022.

Westpac acting chief economist Michael Gordon, told Newshub the bank is forecasting house price growth to slow, in line with Reserve Bank forecasts. This is mainly due to expectations mortgage interest rates will rise. 

"Our forecast is for house price growth to slow substantially by the end of this year, turning to modest price declines from the second half of next year," Gordon said.

Five-year rates have been rising since April, he said. The more popular one-to-two-year fixed mortgage rates started rising in July.

Mortgage rates are now back to around where they were after the 2020 lockdown.

"I expect the OCR to have reached 1.5 percent by the end of next year, which would be consistent with a two-year mortgage rate of about 4 percent," Gordon said.

"That would be back to where it was in early 2019 - quite manageable for established homeowners, but it would meaningfully change the arithmetic in terms of future house purchases."