Kiwibank economists now see house prices falling 13% by the end of the year followed by a 'slow' recovery

By David Hargreaves

The current "yawning gap" between supply and demand points to New Zealand’s cumulative housing shortage disappearing over the next 12 months, according to Kiwibank economists.

They have revised down their estimates and now see house prices dropping 13% by the end of the year. Previously they expected a 10% fall.

In the latest Inner Kiwi publication, Kiwibank senior economist Jeremy Couchman said despite the well documented material and labour shortages, an additional 41,700 private dwellings were constructed in the year to June 2022.

"That is by far the largest annual increase in dwellings in StatsNZ dwelling estimates going back to 1991," he says.

"To put the gain in homes in context, the peak in construction during the mid-2000s only managed to produce a net 30,000 homes. And looking at the 2018 census data 41,700 dwellings is roughly the same as the number in the whole Southland region."

Couchman says the "seismic shifts" seen in housing supply and demand have driven down New Zealand’s housing shortage to an estimated 23,000 homes, "still large but massively down from a revised 57,000 shortage estimated last year".

He therefore sees the housing shortage disappearing over the next 12 months.

"A growing surplus of houses ahead is likely to weigh on New Zealand’s housing market and generate a slow recovery in house prices.

"After the post-covid boom of 2021, the housing market is clearly in retreat. Credit conditions have tightened dramatically, in large part due to the RBNZ embarking on aggressive interest rate hiking to tame multi-decade high inflation. And the RBNZ isn’t done yet."

Kiwibank economists are forecasting the Official Cash rate, currently at 3%, will reach 4% by the end of 2022.

"House prices have recorded falls in every month in 2022 so far. We have downgraded our house price forecast and now see house prices fall by 13% by the end of the year. Our forecast would take house prices back to where they were at the start of 2021. Our projected recovery in house prices is weaker too," Couchman says.

He says the concern now is that with a housing market in decline, and a lack of prospective buyers, some developers may further delay or even cancel planned construction work.

"Residential building intentions data in recent business confidence surveys do indicate a sharp fall in residential investment growth is just around the corner."

This story was originally published on Interest.co.nz and has been republished here with permission.