How to handle a drop in house prices

by Ashley Church

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Jun 13, 2022

There’s a lot of conflicting information about what’s happening to the property market right now and some wildly different figures being thrown around to describe what’s happening to house prices. Frankly, we won’t really know exactly where things sit for a few months and we have the benefit of perspective and hindsight with which to look back and see what was really going in.

But regardless of which figures are correct, there’s no doubt that the market has turned and that, depending on where you live, house prices have come back from the highs that they reached in 2021.

Meantime, it’s important to remember that all of the different views – mine included – are just opinions. There are just too many variables at play at the moment to fully account for all possible outcomes and anyone who claims to have absolute certainty about how this all plays out is either fooling themselves or trying to fool you.

But although no one knows what will happen – it is possible to get through the next few months without too much stress by simply taking account of the bigger picture and making some simple preparations.

Here are a few suggestions on what you can do:

1. Prepare for higher interest rates

If you’re one of the majority of kiwis who fixes their mortgage interest rates, then you may not yet have seen the full impact of an increase in those rates. My strong advice is to prepare for this now – which means talking to Fundmaster to determine where rates might be when you come to refix and looking at your budget to make sure that you’re prepared for the change when it comes. Forewarned is forearmed.

2. Your Bank will take a responsible approach

The banks are keeping a very close eye on what’s happening around the country and are as anxious as you are to know how the market will respond. Provided you keep them informed, you’ll find them understanding and ready to take a pragmatic and supportive approach – so don’t panic.

3. It’s all relative

Unless you’ve bought your home relatively recently, or are using it as security against another asset, a drop in its value will still be relatively insignificant compared to the increase you’ve seen in its value over the past few years. Houses in many parts of the country have seen their value more than double over the past ten years – so even if we see the national median house price drop by around 11% as we did after the GFC- it will still be a small fall relative to years of big gains.

4. A drop in house prices isn’t ‘real’ unless you sell

If you’re happy in your home, have reasonable equity in it and have no intention of moving anytime soon – then a drop in value is little more than a number on a piece of paper.

5. House prices will recover

If 50 years of New Zealand home loan and housing market history teaches us anything it’s that house prices will recover. The long run trend of the kiwi market is strongly upward with house prices having broadly doubled in each of the 4 decades following 1980 – despite global financial hits in the form of the GFC and the Asian Financial Crisis over the past 20 years. So if you see a fall in the value of your home – I’d encourage you to take a medium term view. The drop won’t be forever.

6. Remember that you’re not alone

If you live in a part of the country where house prices are dropping – the same thing is happening to your neighbour. That may seem like cold comfort in the face of a loss of equity but it puts an important perspective on what’s taking place around you. Other’s will be in the same boat and facing the same issues.

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3 Comments

  1. “The long run trend of the kiwi market is strongly upward with house prices having broadly doubled in each of the 4 decades following 1980 – despite global financial hits in the form of the GFC and the Asian Financial Crisis over the past 20 years. ”

    I am quite interested to see where the growth in property comes from, given that we have reached the pinnacle of the bottom as far as interest rates can go. Will we ever see a scenario where interest rates ever hit 2% again. I cannot fathom an economic event that will force the hands of the world central banks, and the RBNZ to do what they did in March of 2020. And if we ever see another pandemic, our most recent covid event would have prepared us to better handle the shutting down of an economy.
    Outside of organic growth that facilitates in growth of house prices, I cannot believe that anyone would say that house prices will trend upwards. The only growth I see coming is if value of house prices drop 40-60% and steadily make a come back over the years. Otherwise, you genuinely have to ask where the organic growth is coming from?

    Reply
  2. “The long run trend of the kiwi market is strongly upward with house prices having broadly doubled in each of the 4 decades following 1980 – despite global financial hits in the form of the GFC and the Asian Financial Crisis over the past 20 years. ”

    I am quite interested to see where the growth in property comes from, given that we have reached the pinnacle of the bottom as far as interest rates can go. Will we ever see a scenario where interest rates ever hit 2% again. I cannot fathom an economic event that will force the hands of the world central banks, and the RBNZ to do what they did in March of 2020. And if we ever see another pandemic, our most recent covid event would have prepared us to better handle the shutting down of an economy.
    Outside of organic growth that facilitates in growth of house prices, I cannot believe that anyone would say that house prices will trend upwards. The only growth I see coming is if value of house prices drop 40-60% and steadily make a come back over the years. Otherwise, you genuinely have to ask where the organic growth is coming from? Going back into history and say the trend is always upwards is a farce at best. If one can equate purchasing a house into its relative cashflow, then it would make sense to buy property at all.

    Reply
  3. “The long run trend of the kiwi market is strongly upward with house prices having broadly doubled in each of the 4 decades following 1980 – despite global financial hits in the form of the GFC and the Asian Financial Crisis over the past 20 years. ”

    I am quite interested to see where the growth in property comes from, given that we have reached the pinnacle of the bottom as far as interest rates can go. Will we ever see a scenario where interest rates ever hit 2% again. I cannot fathom an economic event that will force the hands of the world central banks, and the RBNZ to do what they did in March of 2020. And if we ever see another pandemic, our most recent covid event would have prepared us to better handle the shutting down of an economy.
    Outside of organic growth that facilitates in growth of house prices, I cannot believe that anyone would say that house prices will trend upwards. The only growth I see coming is if value of house prices drop 40-60% and steadily make a come back over the years. Otherwise, you genuinely have to ask where the organic growth is coming from? Going back into history and say the trend is always upwards is a farce at best. If one can equate purchasing a house into its relative cashflow, then it would make sense to buy property at all.

    Reply

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