OPINION: Treasury sees no big decline in house prices

Managing Director of Barfoot & Thompson, Peter Thompson, shares his outlook.

Treasury’s latest budget forecast that house prices nationally will fall 5% this year and a further 1.5% by December 2023, will do little to assist those considering buying or selling in the current market deciding whether they are paying too much or accepting too little for a house.

Treasury’s figures are at the low end of those making forecasts and are just more numbers predicting where prices are heading.

Currently, most economists are picking a fall in prices of between 5% and 10% depending on whether they are talking 12 or 18 months.

Westpac’s forecasts are the outlier with a 15% fall in the next two years.

However, it needs to be noted that Westpac qualifies its forecast by saying it is based on CoreLogic’s house price index. This is an important point which I will comment on later.

I am not criticising Treasury and its forecasts, or any organisation or individual that engages in forecasting house prices.

The variables that came into play in terms of changing economic conditions, possible regulatory changes, major unforeseen events and changing consumer confidence creates a volatile mix that can see trends change almost overnight.

I take two clear messages out of the latest Treasury forecast:

1.  Those that are waiting for (or willing) house prices to collapse or fall significantly in the next 12 to 18 months are likely to be disappointed as even if there is a fall of 15% as forecast by Westpac, prices will still be higher than they were at the start of 2021.
2. Prices have (or are) falling, but falls are likely to be modest and few home owners are likely to face the prospect of negative equity.

The biggest challenge most of us have when reading commentary about house prices movements, whether they are falls or increases, is appreciating what the price movement prediction is being measured against.

And that leads me back to the point I make about Westpac’s 15%-fall forecast.

The Bank clearly states that the fall is measured against CoreLogic’s House Price Index. It is not being measured against peak prices or those prevailing at December 2021.

Westpac is giving the reader context.

How often do we read or hear media coverage that prices have risen or fallen by X%, but without context against which the rise or fall is measured?

Again, this is not a criticism, it is recognition that modern communication reduces complex subjects to sound bites, which are ideally between 5 and 10 second long.

Sound bites do not allow for qualifications.

Rather than forecasting prices, the real estate profession’s focus should be on estimating where prices are at - based on prices at which similar local properties are currently selling.

We can then advise the vendor as to the relevance of their price expectations.

Each month Barfoot & Thompson releases its sales data, and as we regularly sell at least 40% of the homes that change hands in Auckland, the data provides a good rule-of-thumb indication of price movements in the month.

I comment on two measures – the month’s prices compared to the previous month, and the month’s prices compared to prices for the same month the previous year.

I often make the point that not too much should be read into any one month’s changes and for this reason, I also include price movements for the previous three months.

Although the three-month average is a better indication of a trend, what also needs to be remembered is that house price sales are ‘seasonal’, with March and November being when prices generally peak.

For those that really want to understand what is happening to house prices on a national and regional basis - I recommend they go the REINZ website and review the two publications released monthly (normally by the middle of the month).

REINZ provides free access to this information, as well as median prices and ‘days to sell’.

Combined with up-to-date information from your real estate agent as to what is occurring in your suburb, any vendor will be well armed to reach a good understanding of what their house is likely to fetch in the current market.