Housing market predictions 2023: Interest rates, looming recession and lower demand expected to continue toppling house prices

The phrase "unprecedented times" has been repeated over and over again to depict the uncertainty the COVID-19 pandemic has caused. 

These unprecedented challenges the virus brought have affected nearly every aspect of our lives and while many feel we are at the tail end of the pandemic, the effects on the housing market still persist.

QV Chief Operating Officer David Nagel has been valuing property in New Zealand for over 35 years but said he has never experienced a market quite like this.

"Sure, we've had cycles upon cycles of price gains and corrections. That's nothing new. But this latest property cycle seems a bit different, and that's what makes it so difficult to predict what might happen next," Nagel told Newshub.

As unprecedented as the housing market may be, there is one thing experts agree on - house prices will continue to fall in 2023.

The country is off the back of a housing prices boom where the pandemic caused one of the highest surges in the world. Now rising interest rates, a looming recession and lower demand could take that surge down. 

Still a way to go to reach pre-pandemic levels

A decline in housing prices could be welcome news to Kiwis who are desperately trying to climb the property ladder but couldn't quite make it during the previous market boom.

However, for those wishful of the time national average house prices were under $700,000 in January 2019, unfortunately, your wishes probably won't come true.  

According to QV's House Price Index, New Zealand's average national house prices have been declining since the start of 2022 - but there is still some way to go until the country is back to pre-pandemic levels.

QV House Price Index.
QV House Price Index. Photo credit: QV

House prices increased nearly 30 percent nationally in 2021, however, in 2022, they've fallen less than half that much on average, Nagel told Newshub at the end of November.

"That indicates to me we've also still got some way to go before we see house prices start to level out again. I expect we'll see a continued decline over the next 12 months, then potentially a year or two of consolidation before we start to see values increase again," Nagel said.

The latest Reserve Bank Financial Stability Report, published in November, found nationally, prices are down 11 percent from their November 2021 peak, with larger falls in Wellington (18 percent) and Auckland (15 percent).

"Our assessment is New Zealand house prices remain above sustainable levels," the RBNZ said. 

"A continued gradual decline in prices towards more sustainable levels remains desirable for long-term financial stability.

"However, a sharper or deeper decline remains a plausible outcome, given the strength of the run-up in prices over recent years, and the potential self-reinforcing effects from negative market sentiment."

Infometrics principal economist Brad Olsen said he expects house prices to continue to fall until interest rates stop rising which is expected to be around mid-2023.

"We'd expect to, therefore, see house prices continue to contract across a lot of next year," Olsen told Newshub. "Although, at the moment, we are seeing those house price falls have fallen in sort of an orderly managed fashion."

"They are not getting wildly out of control, they are steadily decreasing and we'd expect that to continue."

"They are not getting wildly out of control, they are steadily decreasing and we'd expect that to continue."
"They are not getting wildly out of control, they are steadily decreasing and we'd expect that to continue." Photo credit: Newshub.

For people who bought in the last two years, they are in an "extremely tricky and extremely challenging situation," Olsen said. This is because their house is likely worth less than when they bought it but their mortgage repayments are substantially larger. 

This means some borrowers who purchased houses around 2021 are now in negative equity, which is an issue if households need to sell their homes.

Mortgage rates

Nagel said there is a clear correlation between interest rates and house price growth. 

"When they were at historic lows in 2020 and 2021, the housing market was as hot as it's ever been, and now that they’ve climbed back up again in 2022, prices are falling back almost as quickly," Nagel said.

Rising mortgage rates make the cost of servicing a mortgage more expensive and therefore reduces housing demand.

High mortgage rates also reduce the pool of potential buyers as fewer people are able to pass a mortgage rate test, therefore, making it impossible to get a loan to buy a house. 

The Reserve Bank (RBNZ) sets the Official Cash Rate (OCR) to help keep inflation in check. Increasing the OCR causes an increase in interest rates which means people borrow less and are incentivised to save and vice versa.

On November 23, the RBNZ delivered its last OCR announcement of the year, hiking the OCR by 75 basis points to 4.25 percent, the highest it's been since 2008. The RBNZ has now added 400 basis points to the OCR since October 2021. 

It prompted the RBNZ Governor Adrian Orr to apologise to Kiwis as New Zealand braces for dark economic times and admitted deliberating engineering a recession to slow spending. 

RBNZ Governor Adrian Orr.
RBNZ Governor Adrian Orr. Photo credit: Getty Images

Since the RBNZ is the bank for commercial banks, its OCR determines banks' lending rates, which means when it goes up banks charge higher mortgage rates to remain profitable.

The repricing of households' mortgages from historically low levels during the COVID-19 pandemic to current interest rates will slow the volume of consumer spending. 

And experts said the OCR hikes aren't expected to stop next year.

"The Reserve Bank couldn't make it any clearer the OCR will continue to rise next year, dragging interest rates up along with it, so it's just as clear that house prices will also continue to fall next year," Nagel said. 

"Then you've also got to factor in ongoing credit constraints, the increasing cost of living, and the looming threat of a recession, all of which puts downward pressure on prices."

But as soon as the RBNZ stops increasing the OCR, housing prices are unlikely to suddenly shoot up.

"There will probably still be that shock from the interest rates coming up so rapidly but also the cooling economy generally is likely to hamper how quickly the housing market might bounce back," Olsen said. 

"There is certainly some potential for house prices to stabilise and then start peaking higher, particularly if population growth does come through stronger."

It's a buyer's market 

Essentially, New Zealand is in a buyer's market.

A buyer's market refers to a situation where purchasers have an advantage over sellers in price negotiations and occurs when supply exceeds demand.

With house prices dropping and supply shooting up, in theory, it sounds like a dream situation for people on the market for a new home.

But as mentioned before, high mortgage rates are putting a damper on buyers, with fewer people able to pass the mortgage rate test.

Olsen said people who are buying at the end of 2022 are having to spend half of their gross household income on servicing their mortgages. 

"There's not a hoard of buyers running around trying to buy houses. The number of people who are able to do so is limited… and that will continue next year as well," Olsen said.

As the mumbles of a looming recession get louder, fearful buyers are retreating further away from the market.

What also comes hand-in-hand with a recession is unemployment.

Olsen said with the RBNZ expected to continue to lift interest rates the resulting economic slowdown will also likely push unemployment up to 5.7 percent, from its current level of 3.3 percent.

If that forecast from the RBNZ comes true, Olsen said more people without jobs will mean a smaller buyer pool and could also force some people to sell their homes. These factors would see continued downward pressure on house prices.

House prices by region

While experts are pretty convinced national house prices will continue to decline in 2023 there is always variation in prices depending on the region.

Nagel said at the end of November, the Wellington region was leading the downward trend with Auckland, Hamilton, Dunedin and Tauranga also showing double-digit declines.

Interestingly, Queenstown is the only main centre still showing positive growth this year, he said.

Nagel suggests Christchurch will also continue to show more resilience than most in 2023 as the city has had lower home values in comparison to New Zealand's other largest cities, which will keep some upward pressure on prices, effectively offsetting a more significant downturn. 

"Otherwise, I'd suggest the cities and regions that have experienced the largest amount of home value growth since the pandemic began are the most at risk of large-scale home value reduction," Nagel said.

The biggest and smallest regional value changes for the November quarter 2022.
The biggest and smallest regional value changes for the November quarter 2022. Photo credit: QV

So, should I buy a house?

With house prices falling some people may want to strike a deal while the iron is hot or wait it out for prices to drop further.

But while houses may come with a reduced price tag it doesn't necessarily mean they are more affordable.

"The falls that you are seeing at the moment don't necessarily mean the next generation is about to see substantially cheaper housing. The cost of paying their mortgage will be quite uncomfortable for a lot," Olsen said. 

Real estate experts have continued to advise people when the time is right for them, rather than getting caught up in what the market is doing.

Buyers should make sure they are looking at their financial position, how their job is looking and their ability to borrow credit to make sure they will be okay with rising interest repayments and any unforeseeable circumstances.