house prices

PHOTO: Economist Tony Alexander explains who will face the biggest impact from house price changes.

According to NZHERALD Westpac last week predicted that house prices would decline by 15 per cent over the next two years, striking the gloomiest note we’ve seen so far from the major banks.

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Independent economist and frequent OneRoof contributor Tony Alexander told the Herald’s Front Page podcast this drop could be even more significant when you factor in the impact of inflation.

“If house prices do fall 15 per cent in two years and you then add inflation of 6.9 per cent and maybe 4 per cent after that, you then get a decline in real terms of 20 to 25 per cent,” says Alexander.

“Quite a strong correction is under way. It will eventually improve the situation quite a lot for the newer home buyers.”

On the flip side, this drop in house prices won’t be good news for everyone. Alexander says that property developers and house flippers will be among those most nervous about the decline in house prices.

“The most at risk would probably be the highly geared, inexperienced and over-optimistic property developers as well as some short-term property traders as well,” Alexander says.

The economist says that current owner-occupiers need not be too concerned about a decline in house prices, given that the market tends to be cyclical.

“For some first-home buyers, their net worth may have gone down, but very few would have purchased with the intention of selling within two to four years. So for most people, it really doesn’t matter all that much.”

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The factor that will, however, impact owner-occupiers is rising interest rates, which have been driven by the Reserve Bank’s monetary policy.

Despite the steady lift in rates, Alexander doesn’t believe it’s reached the stage where many New Zealanders will be at risk of losing their homes.

“When homeowners borrow money in the first place, the bank would have required them to show that they could service an interest rate of at 6.5 per cent,” says Alexander, explaining that the banks have now increased this to 7.35 per cent.