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The Reserve Bank’s most recent Economic Statement in relation to future house prices sees them continuing to decline through to 2024 and finally settling at 19% below the level of the peak prices set in November last year.
A key factor that might undermine the Bank’s economic forecasting is the human factor. When people have choices, they don’t always follow the script.
In this case the script assumes that the combination of economic factors in play will lead to vendors lowering their expectations and accept the prices on offer. Past practice, however, suggests that when prices fall, many vendors sit tight and wait for the good times to return.
Currently, and what has occurred in past house price downturns, while sales numbers might fall to about two-thirds of what they are when the market is on the rise or prices are stable, prices find a sticking point.
It’s that third of the market that puts off selling that tends to cushion price falls.
This third of the market either does not have the confidence to sell and buy in a falling market or, if the vendors are exiting the market, choose to sit tight until better times return.
Real Estate Institute data has the median prices at which houses sold nationally in October at $825,000, which was 10.3% below the peak median price established in November last year of $920,000.
What will come as a surprise to most people, who have the perception that house prices have continued to fall in a straight line since November, is that over the past four months house prices have plateaued.
The table, which shows the Real Estate Institute’s national median house price by month since the start of the year, compares October’s median price with that for the nine preceding months.
The table shows that October’s median price is higher than that for the previous three months, and is 3.1% higher than at its lowest, which was in August.
I am not aware of anyone forecasting such a trend would occur.
Table
Month Median Price % change October v month
January $880k -6.7%
February $885k -6.8%
March $890k -7.3%
April $875k -5.7%
May $840k -1.8%
June $850k -2.9%
July $810k +1.9%
August $800k +3.1%
September $811k +1.7%
October $825k
This table compares October’s median price with each of the preceding 9 monthly median prices. It shows that for the first 6 months, October’s median price was lower and that for latter 3 months it was higher.
It’s a fair question to ask, what was occurring before the latest Reserve Bank forecast, and if house prices were defying what the economists were forecasting, where will they now go.
My observation is that prior to the Reserve Bank’s latest statement the market had reached a consensus as to what was fair value, and sales numbers were edging higher. With the normally high sales months of November and December ahead of it, the market could have anticipated a reasonable run in to the Christmas/New Year break.
The Reserve Bank’s statement that the OCR was increasing by 75 points came as no surprise. It was well flagged and built into expectations. On that basis, this increase alone is unlikely to have stalled any upward movement taking place.
What was not anticipated was the Reserve Bank’s statement that really tough economic times lay ahead of the country into 2024, that inflation was still on the rise and that the economy is ‘likely’ to fall into recession during 2023.
Rather than a soft landing the Reserve Bank is now forecasting a hard one and the Governor used what some have termed ‘aggressive language’ in telling consumers to slow down spending and workers to curb wage demands.
The Bank’s actions have immediately created uncertainty but just what it will do to future house prices remains unclear.
The Reserve Bank’s economic forecasting that accompanied the November announcement says it anticipates house prices will continue to fall into 2024, and that the fall in prices from peak prices will be 19%.
If that forecast is correct, prices still have some way still to fall.
What only time will tell is whether vendors are prepared to go that low.
With the house market season in its last weeks before the holiday ‘slowdown’ it is likely to be in early April, when March sales data becomes available, before we have a real fix on where the market is tracking.