2022 was a bumpy year in the housing market. What will 2023 bring?

Buying a home wasn't easy in 2022. Will it get easier in 2023? Photo / Fiona Goodall

House prices have been on a rollercoaster ride in the three years since Covid hit, stumping property pundits.

Economists first tipped prices would face big falls when the pandemic hit in 2020. Instead, they leapt by more than 30 per cent.

Then, pundits forecast prices to rise slowly or possibly drop a little this year. Instead, they plunged by the biggest amount in more than 10 years.

And now that prices are continuing to fall while interest rates are climbing, what will the housing market do in 2023 and what factors should we keep an eye on?

A number of pundits pull out their crystal balls to make some - tentative - predictions.

2022: A quick recap

Auckland's housing market was gloomy in 2022. Photo / Dean Purcell.

House prices hit a record high at the end of 2021 before continually falling this year.

The Real Estate’s Institute’s House Price Index found the market fell 13.7 per cent between November 2021 and November this year – the biggest year-on-year fall since the Global Financial Crisis.

Analysts OneRoof and Valocity recorded similar results.

They said Wellington fell the most, with average property values plunging $201,818 or 17.7 per cent to $940,000 from record highs recorded earlier this year.

Auckland was the country’s second worst affected region. Its prices peaked in November 2021 but have since fallen $180,000 or 12 per cent to $1.4m.

A swathe of headwinds were to blame for the price falls, according to pundits.

Key among them was inflation, which reached its highest level in 32 years, Infometrics economist Brad Olsen said.

Inflation rose on the back of a number of factors, including the Government printing cash as stimulus during the pandemic, supply chain woes and war in Europe.

To combat inflation, the Reserve Bank repeatedly raised the Official Cash Rate from record lows in 2020, with more rises expected next year.

That, in turn, led banks to raise mortgage rates, putting pressure on homeowners who saw their interest repayments leap by thousands of dollars in less than a year.

Banks also tightened lending rules in response to new Government laws. That made it harder for home buyers to get loans and helped reduce buyer demand.

The number of homes on sale also jumped dramatically during 2022, further weakening buyer demand, while more people also moved overseas than came into the country.

Kelvin Davidson from CoreLogic said the collection of factors meant while pundits tipped prices would fall, most failed to predict by how much.

“We, and many others, underestimated how deep the downturn in sales volumes would become and also how far house prices would fall,” he said.

Predictions: What about 2023?

Most pundits tipped prices to continue falling in 2023. But they expected the speed of the falls to slow.

Davidson said his team at CoreLogic had recorded about a 10 per cent drop in average Kiwi house values and believed another 10 per cent drop was possible in 2023.

That would be greater than the 10 per cent drop during the GFC, but would mean house prices were still higher than they were before Covid hit, he said.

Valocity’s Wilson also expected continued falls but said they would likely become milder or even flatten out as 2023 progressed.

Economist Tony Alexander concurred, saying there would be more falls but also that there were increasing signs the market was turning and that it wouldn’t collapse in 2023.

What to keep an eye on in 2023?

Auckland's house-building boom peaked at the end of last year, some in the construction industry are saying. Photo / 123rf

The number of homes selling

“It’s been striking just how weak sales activity has been this year, as buyers have taken their time to decide about purchases and vendors have also been able to ‘sit tight’ too,” CoreLogic’s Davidson said.

Falling prices meant buyers had been holding off on making purchases in the hope they could snag better deals later, pundits said.

That contributed to annual sales falling 29 per cent.

Economist Alexander picked that demand was slowly turning around.

There were 19,000 homes on sale nationally at the start of December 2021, he said.

But as buyer demand slackened, the number of homes on sale climbed to 28,400 in August this year.

However, with fewer people putting their homes up for sale, that had now dropped to 26,500 and was likely to continue falling, which in turn should increase buyer demand.

Still, Valocity’s Wilson didn’t anticipate a big uptick in sales next year.

“We’re seeing more properties come to market off the back of spring and we expect that to continue into summer, but we’re not necessarily seeing them flying off the shelf,” he said.

Migration and demand for new-build homes

Alexander also pointed to migration as an area to keep an eye on.

Falling migration during Covid played a role in buyer demand slumping, until, in late-2021, net migration hit “minus 14,000 and worsening”, he said.

However, by October this year migration had risen to minus 4000 as more people began to enter the country – a trend that should help boost demand.

Problems in the construction sector might also encourage buyers to look for existing homes rather than new builds, also potentially boosting demand, he said.

“Potential buyers have become scared of committing to new-builds because of the growing list of building business failures and the highlighting by media of lifetime savings lost by purchasers left out in the cold,” he wrote this month.

Who will buy and sell?

Valocity’s Wilson said first-home buyers would likely still be on the hunt for opportunities next year.

“Less competition from investors means they will be able to stay more active in the market, and keep their share high, even if the actual number of deals falls away,” he said.

“Investors are very sensitive to interest rate increases, and while we couldn’t say with confidence their share of the market will decline significantly from current levels, they will be under pressure.”

CoreLogic’s Davidson agreed, saying first-home buyers had increased their share of purchases from 20 per cent earlier this year to about 24-25 per cent now.

Home loan interest rate rises

Wellington experienced the largest drop in house prices in the country this year. Photo / 123rf

Home buyers could expect interest rates to keep rising with the Reserve Bank clearly signalling it expected to further raise the OCR in its bid to tackle inflation.

The rising rates, combined with an increased cost of living, would continue to make life tough for homeowners, pundits said.

That was especially the case for those who fixed on ultra-low interest rates and would have to refix at rates well above 7 per cent, resulting in bills potentially tens-of thousands of dollars higher.

Valocity’s Wilson said buyers might have been scared, not only by the Reserve Bank’s predictions of further rate rises, but also its warnings of a possible recession and rising unemployment.

Inflation and unemployment

“Inflation is the elephant in the room and won’t disappear overnight,” Wilson said.

“But while cost-of-living pressures are reaching across nearly all parts of our daily lives, we’re actually not seeing a significant drop in spending and that’s probably because a lot of people still haven’t had to fix their mortgage at a higher rate,” he said.

“When that happens, those mortgage rates begin to really bite.”

CoreLogic’s Davidson said the job market would be a key area to keep an eye on in 2023.

“Overall, then, 2022 has been a challenging year for the property market, which would have been worse if employment hadn’t been as strong,” he said.

“Next year, the jobs market will remain vital in limiting the size of price falls and the potential scale of negative equity and/or mortgagee sales.”