Are we at the top of the housing rollercoaster yet?

As headlines highlight how much houses ‘‘earn’’ (considerably more than most people, it seems) and the average price for a house passes $1 million, it’s easy to forget that only 10 years ago house prices were falling.

Interest rates started to tentatively rise as New Zealand and the world started to recover from the

2008-09 Global Financial Crisis.

The road was far from smooth, as governments tried to rein in spending following the splurge to stabilise economies during the crisis. In New Zealand, households remained cautious, and farmers used the high milk price to pay down debt. House prices faltered.

Today, the global economy is again recovering from a crisis and policymakers are again easing back on moves to stimulate economic activity. Will house prices fall as they did in 2010-11?

This economic cycle has been similar to 2008-11, except on steroids. Stimulus has been larger, and interest rates lower. The recovery has been faster and stronger. Asset prices have boomed: The New Zealand sharemarket rose 30 per cent in the 18 months following the outbreak of Covid and house prices rose 35 per cent.

This shorter, sharper recovery is driving a shorter, sharper policy reaction as the global economic boom and lingering Covid impact has driven inflation higher. Mortgage rates are already rising, and the Reserve Bank is signalling further interest rate rises in the next 12 months.

Rising interest rates should slow house-price inflation. In theory, the faster interest rates rise, the more sharply house prices will correct as mortgage payments increase and homeowners are squeezed.

New Zealand house prices are more than 160 per cent higher now than in 2011 – one of the highest levels of houseprice inflation across the OECD.

Consequently, household debt levels are also higher. Low interest rates have driven the total value of mortgages up by more than $45 billion in the past two years to around 100 per cent of GDP.

Of course, ‘‘this time is different’’ because every time is different. And while interest rates are the dominant driver of house prices, they are not the only one.

Population growth and the supply of new homes also play a part. These factors kept house prices rising back in 2014, as the official cash rate rose from 2.5 per cent to 3.5 per cent.

In 2014, migration was high and rising. In 2015, the population increased by 160,000, some 65,000 of whom were migrants in immediate need of a home. At the same time, only 5.7 residential units per 1000 residents were consented.

Those wheels have turned, and sharply. In the year to June, New Zealand’s total natural population increase (births minus deaths) was estimated to be 27,700, a slight increase on the preceding year. However, with the borders closed by Covid, our total population increased by only 32,400, down from 111,000 during the previous 12 months.

At the same time, housing supply has increased. According to Stats NZ, the number of new homes consented per 1000 residents rose to 9.3 in the year ended September 2021, up from 7.4 in the previous year and 5.4 in 2014.

So are house prices on the way down? While those key indicators are all pointing that way, one major signpost is pointing in the opposite direction: The historic underbuild of houses in New Zealand.

The near-term outlook for house prices is undoubtedly gloomy. And like any market, fear and greed dominate in the short-term and exacerbate underlying market conditions.

That said, trying to predict house prices is like trying to forecast the weather; highly uncertain and subject to change. As interest rates, government policy, migration, and the construction sector change, so will the future path of house prices.

Yet in times of uncertainty, it is wise to reduce risk. This can be done via fixed mortgage rates and paying down debt.

House prices could be a rollercoaster ride, and no-one wants to get thrown off at the highest point.

The nearterm outlook for New Zealand house prices is undoubtedly gloomy.