Private property issue #108 - Property market update

What’s happening in the property market?

We’ve turned a corner. But today, we’re going sideways.

What will happen next?

NZ house prices go through 10-year cycles. Here’s approximately what happens:

• prices boom for 6 years
• they fall for 2 years
• they’re flat / in recovery mode for another 2 years

Then it all starts again. Each region is a bit different. This is just the national average.

So, where are we today?

• House prices peaked in November 2021
• they fell for 18 months and bottomed out in May 2023
• Property prices have been recovering for the last year (up 4% from the bottom).

This property cycle is going as expected.

We’re a year into what is likely a 2 - 2.5-year recovery. Then house prices will probably go up again.

(Side note – when I say “go up again” … I don’t mean a Covid-type boom. I mean a gradual rise.)

How do we ‘know’ the recovery will only last another year?

We are squarely in recovery/flat mode.

Buyers are still sitting on their hands. The high interest rates are scaring them off.

And although interest rates are coming down a bit, the man on the street hasn’t noticed.

That’s because most interest rate falls are happening behind the scenes.

For instance, my brokers at Opes Mortgages regularly negotiate 0.5% off one of the bank’s interest rates.

But you can’t see that drop on a billboard or TV advertisement. So, the (slight) fall in interest rates hasn’t been picked up.

It’s true; more properties are selling. So, demand is picking up a bit.

But more sellers are coming to market, too. That means buyers know they can take their time. They can see more properties for sale on TradeMe.

Together, the two things are keeping prices flat.

This will continue for another year. Here’s why –

The Bright Line Test will change in July.

People who would’ve had to write a cheque to the IRD for $50,000+ can soon sell their properties and pay no tax.

Some investors will list their properties for sale. Listings will go sky high, so prices will stay flat.

But think a year into the future. What could change?

At that point, we’ll be 2 years into the recovery and:

• inflation will likely be back in its box
• the Reserve Bank say they will cut the OCR by then
• mortgage interest rates should start to noticeably come down.
• the people who needed to sell becuase of high interest rates will have listed their properties already.

That’s where the property cycle kicks into gear, and prices go up in some parts of the country.

That’s why most banks say house prices will take off in 2025.

It looks like a standard 18-month downturn followed by a 2 - 2.5 year flat market. Then, property prices could start to rise again.

But, I do need to caution that prices won’t rise everywhere. It depends on where you own properties.

Where will house prices go up the fastest?

Property prices rise in different parts of the country at different times.

Today, house prices in the Bay of Plenty aren’t doing well. They're up 2% compared to the bottom of the market.

Auckland is about average. Property prices in our largest city are up about 4% since they bottomed out.

But some areas like Otago are already seeing pretty big property booms. Prices there are up 10% from the bottom of the market.

Where might property prices go up over the next few years?

My best guess is that prices will rise in the big cities – Wellington City, Auckland and Christchurch.

The reason for this starts 9 years ago.

Back in 2015, property prices started taking off in regional New Zealand.

Between 2015 and 2020, property prices in places like Whanganui and Gisborne doubled. Meanwhile, prices in Auckland and Christchurch were flat.

Then Covid came along and created another property boom. House prices in those smaller regions boomed another 50%.

So over a short 6-8 year period, house prices in some places tripled.

How likely is it that house prices in these smaller regions will boom again in the next 5 years?

Not likely. Prices are overcooked.

That’s why property prices in the middle of the North Island are overvalued. Compare that to parts of the South Island and some of the big cities, which are undervalued.