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Myth That House Prices Never Fall May Be Shattering

Fuseworks Media
Fuseworks Media

By Simon Louisson of NZPA

Wellington, June 13 NZPA - The Economist magazine recently unkindly recalled former US Fed chairman Alan Greenspan's prediction that house prices "have rarely fallen and certainly not by much".

In real terms (adjusting for inflation) US house prices are down 18 percent on a year ago.

Lots of people in this country believe that is unlikely to happen here. But actually it is starting to happen and may well be equally as severe.

The Reserve Bank this month forecast a 13 percent fall over three years, and when adjusting for inflation that equates to a 22 percent plunge.

The bank helpfully pointed out house prices fell a whopping 38 percent in the wake of the first oil shock of the 1970s.

The Economist pointed out the plunge in US prices is already greater than the 10.5 percent fall they experienced during the depth of the Great Depression in 1932. And during the Depression, general prices actually fell, compared to inflation of over 4 percent at present.

BNZ economist Mark Walton points out that to put this into context you have to look at the huge rise in house prices, both here and in the US, that led up to the current situation.

What is happening is what sharemarket analysts describe as a "healthy correction" when a market falls after a big run up.

Real Estate Institute figures this week showed the median price in May was down 1.4 percent on a year ago. But those figures understate the fall as there was a big drop in sales of houses under $600,000 against a small increase in figures over that price.

The most worrying aspect of the REINZ figures was that sales were down a massive 53 percent on a year earlier. The time taken to sell lengthened nationally from 44 days in April to 49 days in May and compared with 30 a year ago. Mr Walton said the two main indicators or future house prices are days to sell and the turnover, and they are getting worse.

"The turnover last month just collapsed from pretty low levels.

"There is no sign yet that we have seen the bottom of the housing market in terms of house prices."

The market is being propped up by people pulling houses off the market rather than sell at much lower prices than they want, Mr Walton said.

"If those properties actually went through to sale, then the numbers would look even worse than they actually are."

Massey University professor of property Bob Hargreaves said economists have been predicting a 20-40 percent plunge in house prices for some time.

One economist wryly noted they have forecast 10 of the last three recessions.

Prof Hargreaves sees prices falling about 10 percent, but not crashing.

"When times get tough, people sit tight," he said.

He said 50 to 70 percent of the 80-90,000 houses sold every year are people upgrading or downgrading or selling investment homes.

He said the market was "actually very sticky on the downside, because people hold their houses off the market".

Those who might get hurt will be those building new homes on spec (and possibly those financing them) as second-hand houses have become more attractive.

Already, there has been a big contraction in the number of new homes being built which typically make up a quarter of house sales. That trend will help self-right the market.

Prof Hargreaves also noted banks here have not been so badly exposed to the US subprime mortgage fiasco.

"I'm a bit more optimistic than some of the other commentators."

Mr Walton, whose bank estimates houses are overpriced by 30 percent when related to income and rents, said the market downturn has a big implications for the economy and the prospect for recession.

"It's fundamental in terms of the spillover effect on retail spending, business activity more broadly, and finally spilling over into the labour market."

Because home owners are not feeling so wealthy, they cut back on borrowing and spending. That has coincided with sharp increases in staples such as milk, bread, butter and petrol. To that can be added higher mortgage payments for many.

"The combination of the much, much, much weaker housing market and the sharp price increases has really crimped disposable income and wealth."

The BNZ believes the Reserve Bank's assessment is highly plausible "and broadly consistent with where we think the housing market is likely to go -- a fall in the 10 to 15 percent range and a risk it could be more than that".

BNZ believes the economy shrank in the first quarter but a "technical bounce" in Q2 may see recession (two negative quarters) avoided.

But the trough has begun earlier than expected and may last longer.

Westpac chief economist Brendan O'Donovan said equity withdrawal (where home owners withdraw more equity from housing than they inject) has turbo-charged consumption in recent years.

A net $5.7 billion was withdrawn in the year to June of which 25-30 percent was consumption spending.

Rather than someone increasing their mortgage to buy a car, he said most equity withdraw occurs after a house sale when someone with a small mortgage sells to a buyer who takes out a huge debt.

Westpac believes equity withdraw will dry up as the housing market tanks and households will move to a net injection of capital.

"Whichever way you look at it, NZ has to go through a period in which consumers spend less than they earn, after years of doing the opposite.

In an article titled "Always look on the bright side," Mr O'Donovan said there are good reasons to expect better times next year. He pointed to high export prices and the Government's tax and spending initiatives.

But he also notes an adjustment needs to happen "and the ironic truth is that the more painful and fast the adjustment, the sooner good times can return".

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