(Bloomberg) -- New Zealand house prices extended their decline in January amid expectations the central bank will keep aggressively raising interest rates to quell inflation and drive the economy into a recession.

Prices fell 7.2% from a year earlier, the largest year-on-year drop since May 2009, CoreLogic New Zealand said Wednesday in Wellington. Values fell for a 10th consecutive month, sliding 0.3% from December. The average house price eased to NZ$953,850 ($617,000).

“In November the Reserve Bank released its gloomy outlook for both the economy and inflation, which was always likely to impact property values in the following few months,” said Kelvin Davidson, chief property economist at CoreLogic. “Buyers still hold the balance of power when it comes to pricing and this has clearly driven a further leg down for values in January.”

The RBNZ increased the Official Cash Rate by a record 75 basis points to 4.25% in late November and projected the benchmark will need to reach 5.5% this year, which could cause the economy to contract. 

Investors have become less certain that the central bank will need to raise rates so high after fourth-quarter inflation came in slower than it expected. However, key labor market data later Wednesday is tipped to show record wage inflation, which economists say makes the next RBNZ decision on Feb. 22 a line-ball call between a repeat 75-point hike or a 50-point adjustment.

While home-loan interest rates are rising in response to the RBNZ’s tightening, the full impact is yet to be felt because many New Zealand households are on fixed-rate mortgages that have yet to roll over onto a new, higher rate. The average two-year rate was 6.6% in December from 4.25% a year earlier, according to RBNZ data. 

As a consequence, economists are predicting house prices will fall further through 2023 and will be at least 20% below their late-2021 peak by early 2024.

In capital city Wellington, prices have already fallen 18.1% from a year earlier, today’s CoreLogic data show. In largest city Auckland, prices are down 8.2% in the year.

Davidson said the pace of house-price declines remains uncertain.

“On one hand there’s now a more compelling story saying that mortgage rates are at or close to a peak,” he said. “With net migration also picking up, these factors argue for an earlier or shallower trough.”

Still, any signs of a weaker labor market and emerging job losses “would tend to dent the prospects for the housing market,” he said.

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