What history tells us about the current property market

November 1, 2024
What history tells us about the current property market - Prendos Property Market Report 2024

With house prices showing signs of recovery amid rapidly falling mortgage interest rates, is it time to rush out and buy something before prices shoot up again? As Prendos Valuations Director and Registered Valuer Matthew Edginton explains, maybe not …

I must have seen six headlines over the weekend calling the end of the housing market downturn. Most of the positive sentiment has been driven by cuts to the OCR and subsequent falls in bank lending rates, together with a bit more activity at open homes. So, is it time to rush out and buy something before prices start taking off? Probably not. It is still firmly a buyers’ market and is likely to stay that way in 2025.

What does history tell us about coming out of a downturn? I looked at the last two downturns in the chart below, being 1998-1999 and 2008-2009.

House Price Inflation - Tony’s View October 2024 / REINZ

Source: Tony’s View October 2024 / REINZ

The first thing I notice is how bad the recent crash was. I wasn’t paying much attention in 2008, but my economic textbooks and property studies have burned ‘08/09 into my brain as the worst period in living memory. Well, the chart shows the downturn we just went through was quite a bit worse.

The other thing this chart shows is that we never get out of negative territory on the first go. In both other instances since 1990 where house prices have fallen dramatically, there has been a second, smaller dip before the real recovery. In other words, this second downturn that we’ve seen over 2024 is completely normal. In fact, it would have been an aberration if 2024 was a good year. Actually, this second dip looks a little on the small side …

The question now is, is this the very bottom like those we saw in 2011 and 2001, and if so, can we now expect prices to take off like they did then? Or is there a bit more downside in this second dip, like in 2010 and 2000?

Back to right now. We’ve been through this before. There was a bit of excitement around the same time last year, as activity levels rose, followed by a few months of rising prices, through to a mini-peak in February this year. That was short lived though, and since then prices have fallen steadily, now sitting more-or-less at the lows of last year and activity levels have been muted. Is this time different, or just normal spring and summer enthusiasm?

There’s a few reasons why I think 2025 could be a repeat of 2024, price wise. Listing levels are too high for there to be much upward pressure on prices. Stock levels are higher even that this time last year and look set to increase as normal over spring and summer. The chart below shows the current green line reflecting the highest listings levels in 5 years.

Total National Listings - CoreLogic

Source: CoreLogic Market Update October 2024

It also shows there is a very strong correlation between listing levels and price growth. In other words, that 2021 line shows the lowest listing levels, which was also when we had the most price growth. 2020 saw the next lowest listings and was also the next best for price growth, and so on. Where will listings be in 2025? Because that could tell us a lot about where prices are headed.

Personally, I expect listings to be elevated again. Many have put off selling their investment property or delayed moving because of falling prices and low activity levels. It’s been too hard to sell. And no one wants to accept a lower price. But last year, as soon as it became clear there were a few more buyers around and we got a sniff of rising prices, these sellers flooded the market, listings shot up and price growth stalled, then fell all the way back down. That will probably happen again.

The chart below shows the longer term nationwide stock of listings. The trend is up. And the real concern is this suggests listings could still go a lot higher.

Nationwide Stock of Listings - realestate.co.nz

Source: Tony’s View October 2024 / realestate.co.nz

We don’t have a housing shortage. In fact, at least in Auckland, we probably have the opposite. Developers have been waiting to see that light at the end of the tunnel before they hit go on some of the projects they’d parked for the last two years. My anecdotal evidence is that has just happened in the last few weeks, as we have had a surge in enquiries for valuations from developers. A valuation is often one of the last steps before a developer gets construction financing, so when they start coming to us, they’re about to get shovels in the ground.

The problem for prices is, there already seems to be a reasonable pipeline of townhouses coming through, so if a bunch of new developments are about to get going, there won’t be a shortage – at least of townhouses – for some time.

Affordability is still worse than average too. While the chart below shows the average value to income ratio (orange line) is now back down to pre-Covid levels, it’s still above the 20-year average.

What’s more, the dark line shows that the share of income required for the average repayment is still just as bad as it was in the market peak of 2021, and throughout the highest interest rate periods in 2023/24. The good news is, this measure of affordability should come down quickly next year with falling interest rates. Another 2% fall in the 1-year mortgage rate (to around 4%, exactly the level it was at right before Covid), should bring that line relatively close to the long-term repayment average. That will be a big support to the market in the latter part of 2025. But as of right now, highly stretched affordability is not a position that prices will launch higher from.

NZ Value to Income and Mortgage Payments Percentage of Income - CoreLogic

Source: CoreLogic Market Update October 2024

So while it may seem like there’s plenty of incentive to get in while you can and scoop up a deal before prices run away again, history would tell us that you don’t need to rush. Elevated listings as we head into summer, developers returning in droves, and consistently stretched affordability would all suggest – to me at least – that the current buyer’s market will remain well into next year.

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