House prices may not get back to their 2021 peaks until the end of the decade, ASB says.
Senior economist Mark Smith said, in the 30 years until 2020, New Zealand house prices had increased six-fold.
"Then in the Covid-era period, we had policy stimulus really thrown out there to try and support the economy. The most interest rate-sensitive part of the economy is typically housing and that took off. We're still living with that hangover now."
He said house prices were still 15 percent below the peak, on a national basis, and 30 percent when adjusted for inflation.
He expected no changes in nationwide median values this year, and an increase in 3.5 percent next year. From there, prices would rise in line with nominal incomes, he said.
"As a result, it is unlikely to be until late 2029 that nationwide house prices approach late 2021 peaks on a nominal basis, and much later than on an inflation-adjusted basis."
Smith said a number of structural factors had changed the market.
For many decades, until 2020, there had been a steady fall in interest rates that allowed borrowers to spend more on properties. That was unlikely to continue.
"Some of the factors that have historically driven falls in the neutral OCR likely still remain in place, but there are some potential upside risks as well," Smith said. "The decline in mortgage interest rates that had occurred from the early 90s up to 2020, that looks to have run its course."
He said population growth had also been a strong support of house prices in the last 20 or 30 years, and that had changed recently.
ASB senior economist Mark Smith. Supplied
"Also in terms of the demographic makeup, a lot more of the people were in that rich cohort of the population who tended to earn incomes and tended to buy houses.
"Now we're on the other side, we're past the sweet spot demographically. So we're looking at slower population growth going forward, and also a less work-rich share of the population as well.
"And those factors will act to temper house price gains. The third factor is probably one that's not really appreciated, the impact on the supply side for housing. So there's been a real increase in housing supply, particularly for those non-standalone dwellings.
"For example, townhouses, retirement units, apartments and the like. And what they're doing is making sure that where people want to live, there's a lot more choice and a lot more housing options. And that's helping to temper the market as well. So we think the collective impact of those three structural forces will really see a much more moderate outlook for house prices going forward."
He said buyers had more time and choice than they did when prices were rising, and sellers needed to keep their expectations realistic.
"House prices will still rise, but we expect the recovery to be more measured, more income-led and ultimately more sustainable."
There would be variation around the country, he said. Auckland and Wellington are further from their peak than the national average, and Canterbury has already recovered much of the price drop.
Smith said there would be wider implications for the economy from the weaker housing market.
In the past, the "wealth effect" of rising house prices has been credited with giving consumers more confidence to spend.
But he said house prices and household spending were now more likely to be driven by income growth than by rapid wealth gains from rising property values.
"An income-led upswing should reduce the risk of economic overheating and support a more balanced expansion which could in turn see a more gradual monetary policy tightening by the RBNZ," he said. "But there is still uncertainty. If the housing market surprises on the upside, the OCR could need to move above our current 3.25 percent peak view in 2027."
He said "old behaviours die hard", though, and there was a risk that house prices could pick up more quickly.
"At present, it is hard to identify factors that will drive a strong house price pick-up, but the art of forecasting post-Covid has been a humbling experience. Even if old behaviours prove difficult to shift, we are not expecting a repeat of the short-lived Covid episode and boom and bust super housing cycle. Back then, a combination of extensive policy support, supportive demand and truncated supply side influences drove a pronounced housing cycle that many NZ households are still recovering from. Few of those conditions look to be in place now."
