House prices need to fall at least another 16 percent to become anything like affordable, one forecaster says.
Housing Minister Chris Bishop caught attention last week when he said house prices needed to drop.
While affordability has been a political buzzword from successive governments, it is relatively rare to hear politicians say they want an outright drop in prices - it is often more politically palatable to wish for them to not rise so quickly.
Infometrics chief forecaster Gareth Kiernan said it was a "politically brave" statement for Bishop to have made.
According to the Real Estate Institute, prices remain 15.9 percent below their 2021 peak.
But house prices were on average 10.7 times personal income, which was higher than any time before 2020, Kiernan said.
Average house prices were 6.7 times household income, compared to a long-term average of 4.5. Debt servicing costs would take 43.4 percent of average household income, assuming someone had a 20 percent deposit, a 25-year mortgage term and an average-priced house on the lowest available mortgage rate.
To get back to that long-term average of 34.4 percent, allowing for a fall in interest rates to 5.9 percent, house prices would need to fall another 16 percent, he said.
"That decline would effectively take prices back to around where they were in the second half of 2020, which isn't that long ago.
"However, to be clear, a further 16 percent decline in house prices wouldn't make housing cheap, it would just make it more like average affordability.
"Returning house-price-to-income ratios to be in line with their long-term averages would require drops of between 32 percent [on the household income measure] and 38 percent [on personal incomes]. Those kinds of declines would be much more difficult to sell politically."
But independent economist Cameron Bagrie said house prices did not need to fall to become more affordable.
"I agree in spirit with what [Bishop] meant but perhaps not what he actually said."
He said it would be better for the economy if affordability improved due to incomes lifting more quickly than house prices.
Sustained falls in house prices would be worrying in terms of what it would mean for the general economy and the banking system, which was heavily exposed to housing loans, he said.
"Be careful what you wish for here."
If there were 10 years of slow house price growth that lagged income growth it would create an orderly return of affordability, he said.
ANZ senior economist Miles Workman said a sharp fall in prices would carry significant confidence and wealth effects, which would result in a hard landing for the wider economy.
He said it could also exacerbate the fundamental problem of New Zealand not having enough housing supply.
"Any transition to more affordable levels is likely to be a lot less destructive if it's driven by the supply side, where policies focusing on freeing up more land for development, housing intensification and cutting red tape are important.
"Not all scenarios that involve house prices falling in the short run will lead to improved affordability in the long run.
"The best medicine to our affordability problem is a supply response. That's not something the [Reserve Bank] can do much about by moving the [Official Cash Rate] up and down as the business cycle ebbs and flows.
"This issue transcends the business cycle and is therefore something for local and central Government to tackle."
Eric Crampton, chief economist at the NZ Initiative, said part of the solution would be to ease zoning rules that were creating scarcity.
"New Zealand's house prices have been artificially inflated by zoning rules and consenting practices that have made it far too difficult to build new subdivisions, new townhouses and new apartments. Easing that artificial scarcity would make housing more affordable."
A zoning change might push up the value of some properties because people would be able to build more dwellings on the land, he said.
"The value of other urban land could fall, if the zoned scarcity that contributes to its value eased. But the cost of housing would and should fall."
RNZ
