KEY POINTS:
Homeowners face at least a three-year wait before properties begin to return to current values, says the Reserve Bank.
In a gloomy report on the economy, the bank predicted house prices would fall 13 per cent over the next three years.
Once inflation was taken into account, the
real drop would be more like 22 per cent.
There was one piece of good news for homeowners - Reserve Bank Governor Alan Bollard said if the economy did not pick up, he would try to kick-start a recovery by dropping the official cash rate.
His comments prompted an immediate reaction from banks. Westpac and ASB dropped their two-year fixed mortgage rates from 9.4 per cent to 9.2 per cent.
But Dr Bollard had other bad news yesterday.
Inflation is predicted to rise to 4.4 per cent next year before falling back below 3 per cent, and unemployment is also expected to rise, hitting 6 per cent by 2011.
Yesterday the Reserve Bank pointed out things could be worse for the housing market.
House prices fell 38 per cent in real terms during the oil shocks of the 1970s, and the credit crunch sent the United States housing market down 16 per cent in the year to March.
But Westpac chief economist Brendan O'Donovan said it was rare to see house prices drop the way Dr Bollard had predicted.
House prices had continued to rise even during the severe housing market downturn of the 1970s, he said, although at a much slower rate than inflation.
Nominal house prices fell in 1998 and 2000, but even in 1998, the larger drop of the two, prices fell only 4.1 per cent.
This time, the Reserve Bank has forecast a sustained drop over three years, although it says the steepest fall, of 7.7 per cent, will be over by the end of the year.
Falling official interest rates and a recovery in the world credit market should put the housing inflation rate back to zero by mid 2011, said the bank.
Mr O'Donovan said prices would be back at their current levels in five years.
"We're living through most of the drop right now."
Goldman Sachs JBWere economist Shamubeel Eaqub said said average mortgage rates would keep going up over the next two years as people on lower fixed rates rolled on to the higher rates being charged this year.
People fixing their mortgage rates now would face high rates for years to come.
Mr Eaqub said high interest rates meant it was not necessarily a good time to buy a first home.
"Everyone is better off just waiting and saving some money. I wouldn't buy until rates were quite a bit lower than 8 per cent."
Property market analyst Kieran Trass warned that the recovery might be slower than predicted, as mortgage rates could rise further if banks increased lending margins to cope with the cost of more mortgagee sales and worsened lending terms with overseas banks.
"I believe this is for property what October 1987 was for the sharemarket," he said.
But Real Estate Institute president Murray Cleland was surprised at the Reserve Bank's gloomy predictions.
He said institute figures out next week would give a truer picture of what the market was doing.
Figures from Auckland real estate company Barfoot and Thompson showed the average sale price slightly increased last month despite the number of home sales falling.
Mr Eaqub said house prices were definitely falling. He expects an at least 15 per cent drop in the next 18 months.
