Private property issue #53 - 2023 house prices

Private Property – our weekly newsletter that gives you insights into what's happening in the NZ property market. Written by managing director Andrew Nicol. Sign up to receive this in your inbox every Thursday.

Last week, Private Property gave the 6 reasons why house prices could turn around in 2023.

To keep things balanced, here are the 5 reasons why they might not turn around this year.

#1 – Inflation could stick around longer

Almost everything you read in the (business) news now comes back to inflation.

High inflation forces up interest rates. And high-interest rates cause house prices to soften.

It’s simple. Higher interest rates make borrowing more expensive. So buying a house becomes much more costly.

So people delay buying their first home or investing.

Economists and banks expect inflation to come down this year. But there’s no guarantee this will happen. It could stick around for longer than expected.

The next inflation data comes out on April 20^th. If inflation sticks around, interest rates will stay high, and house prices will likely remain where they are, for now.

#2 Even if property prices come down … they’re still high

ANZ forecasts that house prices will drop 22% compared to their peak in November 2021.

But even if that happens, some argue they are still too high.

This graph appeared in last week’s Private Property. It shows that the house price to income ratio is almost back to where it was before the pandemic.

However, that doesn’t mean houses are affordable or current prices are sustainable.

Let’s compare today’s house price to income ratio with the one from 30 years ago –

• Today, the house price to income ratio is 2.75x higher than in 1992

• At the market's peak (Nov 2021), that ratio was 3.4x higher than in 1992.

Even if the temperature gets turned down … it’s still flaming hot.

#3 – People don’t feel good about the economy

Both business and consumer confidence are low, and the economy shrank by 0.6% in October – December 2022.

To be fair, 0.6% is nothing. The prior quarter the economy grew by 1.7%, and by 1.6% the quarter before that.

So the economy is still better off than 6 months ago.

But that kind of perspective won’t make it into news headlines.

In March, I read headlines like: “The NZ economy shrank” – Newshub; “Economy on the skids” – Stuff

Feeling down about their financial prospects makes people less likely to commit to a big financial decision.

Things like buying your first home, moving house, or purchasing an investment property get put on the back burner.

#4 – Property investor taxes are only just kicking in

18 months ago, Labour introduced new taxes for property investors.

Over the next month, property investors will receive their tax bills from their accountants.

On average, property investors will have to give the IRD an extra $1500 this year.

Next year, it will be $3k. $4.5k the year after and $6k the year after that.

This could keep property investors out of the market, keeping house prices down for 2023.

#5 – Banks are keeping the purse strings tight

While some banks are loosening their lending criteria … it’s still tight.

It’s much harder to get a mortgage today than it was 5 years ago.

And if you can’t get a mortgage, you’ll struggle to buy a house.

Will house prices go up in 2023?

This edition of Private Property is deliberately doom and gloom.

But that doesn’t mean I feel gloomy about the housing market.

Instead, this is to show that you need to consider both sides of any debate.

So read this week’s Private Property in conjunction with last week’s, which considered the reasons to feel positive.

That way, you can make up your own mind about whether you think 2023 is a good time to invest in property or not.

In my view, I think house prices will turn around in some parts of the country this year. Places like Auckland, Christchurch and maybe Queenstown too.

They’ll likely stay down in other areas – Gisborne, Manawatu-Whanganui and Wellington.

Of course, no one knows, and no one will get it 100% correct.

But if you’re buying to hold that property for 20 years, it probably doesn’t matter what will happen this year.