Labour market sets property downturn apart from 2008 Global Financial Crisis


A strong labour market is expected to keep a floor under falling residential property values, which have been trending down on declining sales volumes.

CoreLogic NZ's Q3 property market and economic update suggested strong employment would be the difference between a housing market correction and a more serious slump, as seen during the global financial crisis (GFC) of 2008.

"Comparing the current downturn to the GFC, one big wildcard is low unemployment, and nobody's expecting it to suddenly spike higher," CoreLogic NZ chief property economist Kelvin Davidson said.

Despite further falls in property values seeming likely in the coming months, Davidson said there was a sense the "mood on the ground" had started to shift, which could help sow the seeds of a floor for property values as soon as next year.

CoreLogic said the total value of residential real estate had already fallen to $1.62 trillion at the end of September, from $1.73tn at its early 2022 peak.

However, household equity was high at 79 percent, with mortgages secured against 21 percent of the total value.

"In a wider context, the economy also continues to perform fairly well," Davidson said.

"Recession was avoided in the second quarter of the year and most indicators point to further economic growth in the near term, another variable to the GFC."

However, Davidson said annual inflation of 7.2 percent would force the Reserve Bank to keep raising the official cash rate, which was likely to reach 4 percent by the end of the year, with further increases in 2023.

In addition, mortgage rates were yet to peak with ongoing global uncertainty weighing on wholesale funding costs and longer term New Zealand fixed mortgages, he said.

Sales volumes were also "very weak" in the past three months, he said.

"Days to sell has also risen, as vendors aren't generally being forced to sell and buyers aren't in any rush either - knowing that they have the pricing power and plenty of choice amongst the existing stock of listings, which has begun the seasonal spring rise," he said.

New Zealand's property values fell a total of 6.3 percent over six successive months, with the average home price down below the million dollar mark at $977,158, from $1,018,770 at the end of the last quarter and a peak of $1,043,261.

"Overall, this downturn in property values seems set to run into 2023," Davidson said.

"But it wouldn't be a surprise to see a floor for values next year, before some kind of recovery potentially begins in 2024 which would be a swifter recovery timeframe than seen following the GFC."

There had been a pick-up in first-home buyers, but both investors and owner-occupiers were struggling, he said.

"Looking ahead, the rest of 2022 and into 2023 looks set to remain a testing time for market activity levels," he said, with a number of factors to restrain sales growth.

"After all, the economy remains a little fragile, net migration could stay relatively subdued, even as the borders fully reopen, and on top of that, credit conditions remain restricted and mortgage rates continue to rise.

"On the whole, challenges remain, but after a weak 2022, our working assumption is that sales volumes rise gradually in both 2023 and 2024, as mortgage rates eventually peak and then perhaps begin to decline a little again."