Private property issue #41 - property market downturn

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Right now, you’re probably seeing a lot of headlines like: “ANZ: House prices will drop 32% in real terms from their peak” – Stuff.”

As well as phrases like: “biggest fall”, “downturn”, or my favourite, “baked-bean-diet coming”.

It’s true. House prices are falling.

But … when you’re reading these property reports, remember that a significant amount of the house price falls have already happened.

Here’s what you need to know.

#1 – 2/3rds of the house price falls have already happened

The Reserve Bank’s house price guesstimate (their words, not mine) predicts that house prices will decline 18.9% from the peak of the market through to the trough.

But the market has already fallen 12.5%. So 2/3rds of that drop has already happened.

We’ve only got a third of the dip to go by their guesstimate.

(And it is a guess. So, don’t get too hung up thinking the Reserve Bank will be 100% correct. No economist is always right. I know. I employ one.)

But to answer the “how far through are we?” question, we should also look at property sales.

#2 – There have (almost) never been so few properties selling

As well as prices, the number of properties sold per year can give us a sense of how the market is doing.

On average, 82,000 properties sell in New Zealand per year.

18 months ago, 100,000 properties were sold annually. Today it’s 68,000.

So for every 3 houses that sold 18 months ago, only 2 are selling today.

And property sales are the lowest they’ve been in 10 years. There are only 2 periods (back in the GFC) where fewer properties sold.

But of course, our country’s population has increased since then.

When you adjust for population, you can see that today 13.7 properties are selling per 1000 people (per year).

Well, below the historic average of 19 property sales per 1000 people.

And this is only slightly above the 2008 property market downturn when only 12.6 properties were sold per 1,000 people.

What’s my point?

The property market has gone from very, very hot … to very, very cold … and it all happened very, very quickly.

And if history is any guide to how far the downturn might go, we are already getting close.

#3 – (Most of) the data points in the same direction

To read the property market tea leaves as accurately as possible, you need to look at a range of data.

So I’ve put together this property market tracker that summarises 7 key stats about the property today compared to last year.

This compares the last 12 months against the worst the market has ever been and the best the market has ever been.

This gives us a sense of where we set compared to historic movements in the property market.

Take the example of annual house price growth.

12 months ago, we had some of the fastest house price growth ever seen.

Today we have the fastest house price declines we have ever seen.

What I’m trying to demonstrate is how far the market has already moved.

Though there are some signs that the market’s momentum is improving.

Look at the quarterly change in house prices. You can see how the market is becoming less cold than it was 3 months ago.

That doesn’t mean that house prices are increasing. But they are falling at a slower rate.

The last 12 months have been a sh*t show … the next 12 months won’t be the same

One problem with news headlines is that they are backward-looking. They’ll report on what happened over the last 12 months.

But what happened last year is not always a good reflection of what’ll happen over the next year.

So, while the last 12 months have been terrible for the property market. The next 12 months will not be a repeat of what we’ve just gone through.

So, to answer our original question – “how far through the market downturn are we?”

Further than you probably think.

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