Property plunge: even worse than you thought

House prices are falling more steeply than official figures suggest, sending household wealth tumbling and curbing consumer spending.

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House prices are falling more steeply than official figures suggest, sending household wealth tumbling and curbing consumer spending.

Two weeks ago, the Real Estate Institute said house prices had fallen just 2 per cent, but Sunday Star-Times analysis shows the fall is much bigger. And the outlook is grim - one economic pundit predicts a 30 per cent drop in prices, and says the heights of November 2007 will not be seen again for 10 years.

But the news isn't bad for everyone - houses are now the most affordable since February 2007, and lower house prices and reduced consumer spending could see interest rates drop. Some commentators, though, believe the Reserve Bank will leave the official cash rate unchanged on Thursday because of concerns about rising inflation.

Star-Times analysis shows that in recent months, prices fell most in Southland, Taranaki, Wellington and Manawatu/Wanganui.

The only two regions where house prices rose were Central Otago/Lakes and Nelson/Marlborough.

The Star-Times compared median house prices at the market peak last November with those of June this year. The analysis shows that since November, the national median has fallen $12,000, a drop of 3.4 per cent - equivalent to an annual drop of nearly 6 per cent.

This decrease is much larger than figures recently released suggest.

Last week Quotable Value said residential property prices in the three months to June were 0.1 per cent higher than for the same period last year, and two weeks ago the Real Estate Institute said the national median price in June was just 2.15 per cent lower than June last year.

While their figures are correct, there were another five months of house price growth after June 2007, meaning the dramatic falls have come only after the market peaked.

Last November, the median price hit $352,000. By June this year, that had fallen to $340,000.

During that time Wellington house prices fell 13.5 per cent, Southland's 12.7 per cent, Taranaki's 7.3 per cent and Christchurch and Dunedin both by around 4 per cent.

Only Central Otago/Lakes (up 19.8 per cent) and Nelson/Marlborough (up 0.6 per cent) were in positive territory.

Experts say the economic uncertainty caused by the falling property market and higher food and petrol prices means people will save rather than spend.

Retail sales fell 1.2 per cent, or $69 million, in May, the biggest drop since a 1.9 per cent fall in February 2004.

BNZ chief economist Tony Alexander expects house prices will fall at least another 5 per cent and doesn't expect them to pick up until 2010-11.

He said first-home buyers were the biggest winners in the falling market, and that lower spending could reduce interest rates.

But Bernard Hickey, managing editor of interest.co.nz, is predicting the gloomier times will last much longer. He says house prices will drop 30 per cent over the next two years as the foreign capital which funded the housing boom dries up, and that it will take 10 years before prices get back to the November 2007 peak.

Hickey said housing affordability was at its best level since February 2007. The Wizard Home Loans Affordability report shows it now takes 78.5 per cent of the median take-home pay to service the mortgage of a median house, down 5 per cent from a peak of 83.8 per cent last November.

Falling house prices would also curb spending. "This is the hangover we had to have after the debt-fuelled spending binge and we don't have any Panadol to make it go away."

Hickey said the Reserve Bank was being prudent, and had told the main banks to include the potential for a 30% fall in house prices in their risk modelling. If prices do fall that much, home owners with 80% plus mortgages could be in negative equity. Around one-fifth of all mortgages have loan to value ratios of 80% or more.

The head of TradeMe Property, Brendon Skipper, said properties were taking 20 days longer to sell - the average property now stayed on the site for 60 days. The number of listings each month was slowing.

However, the rental market was "going gangbusters" he said, with the number of properties being listed for rent increasing 38 per cent over the past three months.

- © Fairfax NZ News