NZ house prices to rise 24% in next 3 years, Infometrics says (Update 4)

House prices in New Zealand will rise by 24% over the next three years due to low interest rates and a shortage of new housing, Infometrics has predicted in a report prepared for mortgage insurer QBE LMI.

(Updates 4 with report comment that prices could be overvalued by near to 30% by June 2012.)

Prices could grow by as much as 11% nationally in the year to June 2010, the report said.

"This positive growth is expected to moderate over the following two years as residential   construction activity regains momentum," QBE LMI CEO Ian Graham said.

"On average, property is now also taking a shorter length of time to sell. The median length of time for sale has improved from an average of 58 days in July 2008 to 41 days in June this year. The level of competition among buyers has increased as financing costs have fallen and the number of properties on the market has dropped away," Graham said.

"Although residential building activity has been at very low levels over recent months, residential consent numbers are forecast to climb back towards 1,500-1,600 per month by the end of this year, and hold in the 1,700-1,800 range throughout 2010.

Further growth in building activity is expected in 2011/12," he said.

"Housing affordability has improved on a national level and the level of demand amongst buyers has increased.

With improved credit conditions and record low interest rates, the motivation for first home buyers and investors to enter the housing market have never been more compelling."

"With a lack of available finance for developers, a significant shortage of new housing is arising in New Zealand and is expected to continue into 2010. The underlying demand for new houses is sitting at 21,000 per year which is strongly driven by an increase in net migration and a reduction in New Zealanders moving overseas. This undersupply of new dwellings, will contribute to an increase in property prices over the next three years," Graham said.

The report said that although house prices were still lower than a year ago, some upward momentum looked to have appeared since the start of 2009 and that further improvement would be consistent with the trends in sales activity and the rate of turnover.

Infometrics based its forecast rises on the average median house price from the three months to June 2009. The national median is forecast to rise to NZ$419,400 by the end of June 2012 from NZ$339,200 this year.

One of the key factors influencing the outlook for house prices is the supply of new dwellings being built. Building consent numbers have fallen to very low levels (just 14,000 over the year to June 2009), and activity is being constrained by the lack of available finance for developers. With underlying demand currently sitting at about 21,000 new houses per year, a significant shortage of new housing is arising. This institutional impediment to activity is putting a floor under property values and is expected to lead to a significant rebound in house prices over the coming 12 months. By June 2010, house price growth is forecast to have lifted to 11%pa. Price growth is expected to moderate over the following two years as residential construction activity regains momentum, but by June 2012, house prices are still expected to be 24% higher than they were in June this year. After adjusting for inflation, this lift represents a 17% increase in real property values over the three-year period.

Of the main centres, the report forecast Auckland house prices to rise by 26% by June 2012, Wellington prices to rise by 22%, and Christchurch prices to rise by 25%.

The Auckland property market probably has one of the most critical housing shortages in the country, as building activity in the region has fallen to very low levels over the last five years. House sales activity in Auckland has shown definite signs of improvement over the first half of 2009, and this upward momentum is expected to feed through into higher prices over coming quarters. Over the three years to June 2012, house prices are expected to rise by 26% (a 19% increase in real terms). The Wellington housing market is currently performing patchily, in part because of uncertainty about public sector employment levels under the National government. This uncertainty is likely to gradually dissipate over the next 18 months as government spending continues to grow. With job security in the region slowly improving, house price growth will generally keep up with the national average, and property values are expected to rise by a total of 22% over the three years to June 2012 (a 15% lift for real property values). People selling property in Christchurch appear to have been more willing to lower their asking price than in other regions. As a result, the correction in house prices in the region over the last 18 months has been greater than in New Zealand's other major urban areas. House prices are likely to rebound strongly over the coming year, and by June 2012, prices are forecast to be 25% higher than in June 2009 (an 18% rise in real terms).

The report noted that inflation-adjusted house prices were currently 15% above their long-term trend-line but could get toward 30% above the trend by June 2012.

Despite a relatively soft outlook for house sales in the near term, the outlook for house prices is more positive. The lack of new residential building activity has put a definite floor under property values, and strengthening population growth will maintain buyer competition across what is expected to be a constrained supply of housing available for purchase. Inflation adjusted house prices are currently an estimated 15% above their long-term trend line (down from 36% in mid-2007), but could climb back towards 30% above the long term trend line by the end of the forecast period. Nationwide house price growth is forecast to average 8%pa over the next three years.

We welcome your comments and insights on the full report below. Lmihousing Outlook New Zealand August 2009_email