We share an opinion with very few other financial advisers out there: we don’t think there will be a housing market crash (especially as there is no hard and fast definition). No matter where you’re at on the level of uncertainty, this article will provide you with all of the information you need to make an informed decision.
Be critical of the media’s reporting, be cautious if you deem that appropriate, but most of all, know the economy will recover.
What Is A Housing Market Crash?
First of all, let’s define what a housing market crash is, sometimes known as a correction. In New Zealand, there isn’t a hard definition, but in general it’s considered a 5% house price drop.
Property commentator Ashley Church states in his own definition a property market crash “is a 20% drop in the median sales from market peak which lasts for more than 12 months” (Source).
Will The Housing Market Crash?
The million dollar question (for some of us homeowners, literally millions of dollars).
If you are up 30% in capital gains over the last two years… What’s a 5% drop to an increase like that? According to Ashley Church’s definition of a housing market correct, we reckon no.
There are a lot of factors in play at the moment, and it’s fair that people panic or feel uncertain during these times, especially when finances are involved. It shakes up your sense of security.
- Media fear mongering with headlines and commentators stating that we’re already on the way downwards
- Interest rates rising back to pre-COVID levels
- Global cost of living increases
- OCR increases by the Reserve Bank of New Zealand (RBNZ)
By the definition that Ashley Church has put forward, we haven’t had a crash since between the years 1975 and 1980, when the house prices had dropped by 38%. We haven’t had this situation again, or have we had anything close to that. Yes, even during COVID-19, a recession, a war, supply issues… You name it. It’s still not the same as we were back in the late 70’s.
Why do people think there will be a housing market crash?
The housing market was surging to unbelievable heights, nearly doubling in some regions. With the introduction of the CCCFA on 1 Dec 2021, and the decision of the RBNZ raising the OCR, it’s very likely the country’s house prices would still be soaring. The CCCFA had backfired immensely, tightening up how everyone borrows money, rather than sharky loan providers. On top of this, to keep the economy churning, the OCR was dropped to a historically low level of 0.25.
First home buyers have been shunted off to the side with the tightening up of the CCCFA as they are the ones who were hit the hardest, and in the property market, account for up to a quarter of all home purchases. The bank of Mum and Dad have stepped in to help out with the ever rising deposits, gifting up to $130,000 on average, which are helping any first home buyer jump onto the ladder.
Since then, the CCCFA has been amended and the OCR has been boosted to 1.5. We’re in Autumn, and the housing market typically slows down during Autumn and Winter, meaning the housing market itself is cyclical and will stick to these cycles. We’ve seen plenty of experts take stock of what is happening in the immediate future or current situation, rather than looking at historical data or how a market behaves. The RBNZ increased the OCR, which does impact interest rates, not for halting the ever-soaring house prices, but to help out inflation. Reducing household spending should, in theory, help slow the high inflation and cost of living we’re feeling globally.
What do we think will happen?
Referring back to Ashley Church and his historical observation, what will happen is we’re heading into a time where house prices will taper off their massive increase. Downturns, or a slight decrease in value, is a typical part of a housing market cycle. You might see a further decrease in the overall value of your home, but know this is also normal and to wait it out – much like looking at the stock market.
We’re also seeing people say ‘we are in a housing bubble’ and claim it’s similar to what happened post Global Financial Crisis. Since then, our banking systems have tightened up and there has been the introduction of financial precautions, such as debt to income ratios and loan to value ratios. In New Zealand, our mortgage debt ($334 billion) is established with a crazy amount of value in our residential housing ($1.72 trillion).
First home buyers will get back into the market and investment properties will get easier to secure. The interest rates for home loans are just back at where they were pre-pandemic, some banks aren’t even hitting the old rates.
Property is first and foremost an investment, and as it is an asset, helps people grow their wealth and cement their financial future. This does mean it is liable to go up and down, typically up because of its asset classification, but it ultimately means wait it out and hold.
Will the housing market crash? Ultimately we think no… Not in the way that’s being talked about all through the media. Are we in a bubble in New Zealand? Also no. Yes, there is a war, a pandemic, supply chains pinched, and cost of living going up, but that doesn’t mean our country hasn’t learned.