House Price Forecasts

Most banks offered house price forecasts this week, they use the wrong data.

Conflict of interest declaration: We are currently selling our best investments, two townhouses so would love to see prices rise. RNZ published an article summarising bank economists views that house prices will stall and not reach the bubble peak for 4-5 years, I disagree. I did this work to see if there was a chance of prices rising this year though, I failed to get a hint on that, the data is here though. Our properties are Here with it’s other half here in case you are interested.

Sales Prices Indexed

I use this index chart to be more able to see direct comparisons with lots of regions. Unfortunately, using the base point as the bottom of the bubble has meant the last year is compressed and difficult to read.

Over the long term sales prices closely follow Household Income (the thin black dotted line), just like rents and have returned to that line since July last year. However Datawrapper don’t allow a variable Y axis yet (I’ve asked) so I have created an identical chart of the same data showing just 12 months, that’s the second chart.

Detail Post January 2023

So taking since January 2023 only it is much more clear what is going on every month. I am interested in Hutt City, so I brought that line forward a bit and can now see prices here rose above affordability (the HH Income black dotted line) over summer. However I’m encouraged that prices have fallen below the line because I believe they will soon join the line again. (hover over Upper Hutt)

A critical note for this chart is that the HH Income line is a forecast since June 2023, I have found this factor in the past to be extremely difficult to forecast, so this is not guidance but best effort data. Last year NZ Household Income rose 10%, I have used 5% for this year based on not much, decreasing to the long term average of 3%. However, having spent the last few weeks in Hospital (Chemo) the sheer number of well paid medical people arriving into our hospitals since my last session 12 months ago, may drive this up. Counter to the assumption that public servant workers (employees and consultants) are falling overall - which I doubt.

Forecasting HH Income

Household income varies - a lot. It’s made up of three factors published annually on Stats website for each region or subregion, I use Wellington Incomes for Lower Hutt. The primary line is “Median Income from All Sources collected”, made up of;

1. Wage and Salary Income (for all members of the household)

2. Self-employment Income (including side hustles, etc)

3. Government Transfer Income (all benefits - including Super)

Using a trend analysis I get great fit to the raw data, but always feel that may overstate, so I pulled the trend forecast back a little

This leads to a chart showing why. Since the beginning of the Household Income data in 1998, typical growth rates have hovered around 3%, although the average is 4.4%. I go with 3% for now, ie the orange columns in the chart, slowing from 5% due to my assumption about high value immigrants still arriving, to a longer term 3%.

Now the next step gets messy. So I have a forecast for growth in HH Income, I also have a QV based Affordability chart, showing that NZ house prices are a simple factor of 7.6 times Household Income over longer periods of time.

Hover over NZ line in 2018 and 2024 and you get very small changes, from 7.7 to 7.6 times Household Income. The bubble took it to 10.5!

The media and bank economists have competed to talk about interest rates holding prices back and their forecasts are based on expected interest rates. Note that apart from the bubble, low interest rates are rarely a price driver - Check out 2007/8 when they averaged for us 8.6% and 9.2%, prices were still rising in 2007!

This is a simple chart showing the average price for each year back to 1998, using the RBNZ House Price Index and QV’s most current data for 2023 to reconstruct prices from the % change index.

The bubble is smaller than I thought it would be in such a chart, but the prices reached are what we may expect. Notice the 2030 year is not double 2020 or $1.4m - the old adage that prices double every 10 years is close in a lot of this chart though so forecast prices look conservative.

This points to a forecast of re-reaching the peak of the bubble in 2025 (about $970k), since the 2025 number is the average for 2025. It does not help me for a forecast of the coming year unfortunately.

As always the tabs at the top have charts updated for rental inventory

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