It's tempting to think the worst is over for the housing market. Interest rates are falling fast. In March the two-year fixed mortgage rate was the most popular and hit a high of 9.64 per cent.
Now the most popular rate is the six-month fixed mortgage and it has fallen to 7 per cent. Housing affordability is improving, with the proportion of a median after-tax income needed to service an 80 per cent mortgage on the median home falling to 63.9 per cent from 82.3 per cent in the year to November, although it remains above the 40 per cent level seen as affordable.
Home buyers are at their most confident in five years. An ASB survey found a net 24 per cent of potential home buyers thought now was a good time to buy.
Taxes will be cut again next April and petrol prices have dived, giving home buyers more disposable income to purchase in a "buyers' market".
So surely house prices have bottomed out and now is the time to jump in? I don't think so.
The pain for home owners and property investors has only just begun and next year is set to be the worst year for house prices in New Zealand's history.
Since February, I have been expecting house prices to fall 30 per cent over the next couple of years from their peaks of last November and to take another decade to recover to those peaks.
That prediction still stands, even though interest rates will be lower than I previously expected.
That's because the price of credit is now irrelevant. Everything now depends on availability of credit and the power of global de-leveraging.
A high-income buyer with lots of equity will still be able to get a home loan at 7 per cent or better. But these will be relatively few and far between.
First-home buyers and property investors are now unable to get the 80 per cent-plus home loans they once could. What appears to be a relatively small change in the equity requirement for home buyers actually has an enormous effect.
For example, a buyer with a $30,000 deposit could have bid up to $600,000 for a house when the lending criteria allowed a 95 per cent home loan. Now that same buyer can only bid up to $150,000 for a house with the criteria at 80 per cent. That is the power of de-leveraging.
The global forces at work are irresistible for a heavily indebted nation such as New Zealand. We have to borrow at least $15 billion a year to pay for our current account deficit, which largely consists of interest payments on old debt and dividend payments to overseas investors.
The cost of borrowing long term overseas has risen by around 3 per cent. Even with an OCR at 4 per cent, which is expected next year, longer term mortgages will still cost around 7 per cent because of the cost of that overseas borrowing.
Home borrowing will be much more difficult and expensive than it was for most of the 2002-2007 period.
I also believe our economy is headed deeper into recession, which will increase unemployment to more than 6 per cent, dragging further on demand for owner-occupied housing.
Export growth will not be the saviour many had hoped for. Commodity prices have dived in recent weeks and the outlook for growth in Europe, China and the United States is awful for next year. Our currency has also started rising again because of a weak US dollar.
The final reason for my forecast is in the chart published here. It shows New Zealand house prices have tracked US house prices and the share prices of US home builders closely since 2001 with a lag of 16 and 28 months respectively.
This suggests New Zealand house prices could fall 35 per cent by 2011.
Graph supplied by Auckland University senior lecturer Philip O'Connor.
Bernard Hickey is the managing editor of www.interest.co.nz, a website for investors and borrowers wanting free and independent news and information about interest rates, banks, finance companies and the economy.