House price inflation in Auckland, which has recently been running at close to 20%, is set to continue in double digits until into 2015, according to ASB chief economist Nick Tuffley.
Tuffley also expects that national house prices are likely to rise to 5.3-times income by the end of 2015.
In the latest ASB quarterly economic forecasts, Tuffley said while house sales in the Auckland region had remained steady in recent months, the continued decline in the number of days taken to sell a house suggested sales may be constrained by supply.
"Housing inventory in the region continues to fall to very low levels, and this is putting upward pressure on house prices.
"We expect annual house prices in Auckland will continue to record double-digit growth until early 2015," Tuffley said.
"Meanwhile, we expect annual house price inflation will peak at an annual rate of around 9% on a nationwide basis in early 2014."
The most recent REINZ monthly figures showed national house price inflation running at 8.4%.
"In Auckland and Canterbury, house prices are now growing at double-digit rates. Outside of these areas, prices are growing at 4-5% per annum," Tuffley said.
"From a monetary policy perspective the [Reserve Bank] will be mindful of the wealth impacts of stronger house prices, and the spillover to stronger consumer demand.
"From a financial stability perspective, the RBNZ is concerned house prices (and debt levels) have increased from already-elevated levels relative to fundamentals such as household income. Nationwide house prices are currently 5x household disposable incomes. The IMF sees the ideal level as being below 4x.
"Based off our house price inflation forecasts, house prices are likely to rise to 5.3x income by the end of 2015."
The overheating state of the Auckland market in particular is becoming a significant economic and political issue. The Government and the Auckland Council have agreed in principle to an Auckland Housing Accord that would aim to fast-track new developments, with an additional 39,000 houses targeted over a three-year period.
The RBNZ has indicated it is looking at placing "speed limits" on high loan-to-value (LVR) lending, a power that is one of the new "macro-prudential tools" the central bank has been developing. See here for our articles on LVRs.
The Government, however, has made clear that it would like to see first home buyers exempt from lending limits, But the RBNZ has made equally clear it does not see scope for exemptions. The Prime Minister was striking a more conciliatory tone on this issue in a speech yesterday.
But over the weekend, Housing Minister Nick Smith revealed that the Government was considering making it easier for first-time house buyers to access their KiwiSaver funds in order to find enough money for a deposit.
Tuffley said there was a "strong likelihood" the RBNZ would imposes restrictions on new mortgage lending at high (80+%) loan-to-value ratios.
Higher rates needed
"We still expect higher interest rates will be needed to rein in the housing market, even if LVR limits are put in place," he said.
"But such limits risk placing the burden of dealing with overheating house prices on first-home buyers, arguably the most deserving of prospective home buyers."
The RBNZ is universally expected to leave official interest rates unchanged at the 2.5% they have been since March 2011 when reviewing them again tomorrow, but will be expected to voice concerns again about the housing market. Economists are expecting the first interest rate rises to come early next year.
Tuffley said building activity in Auckland and Canterbury had responded to supply shortages and increased over the past year. However, the supply response had been slow and it would be a number of years before the supply/demand imbalance was fully restored.
Concerning development
"A concerning development on the supply response is the strong growth in land prices over 2012 which has muted the price signal to build more houses rather than buy an existing one," Tuffley said.
Low interest rates, a recovering labour market and increased consumer confidence had contributed to increased housing demand.
"The turnaround in net migration to positive inflows over 2013 will also add further to demand for housing. Meanwhile, investors have noticed the housing shortfall and potential for capital gains. Investor confidence in housing returns has steadily lifted over the past year."
Tuffley said higher house prices had supported an improvement in consumer confidence over the past year, which in turn had flowed through to retail spending growth.
"In particular, there has been a recovery in spending on durables, reflecting the improvement in household optimism about big-ticket purchases. We expect consumer spending will continue to recover over the coming years, as households feel more confident in light of higher house prices and improving labour market prospects."
Business confidence surveys pointed to an improvement in hiring and investment intentions in recent months, as businesses felt more confident about expanding their operations, Tuffley said.
Employment pick-up
"Consequently, employment growth should pick up over the coming year, gradually pushing the unemployment rate down over the coming years to reach 5% by the end of 2015."
Tuffley expected that, overall, stronger construction activity and recovery in business investment would drive gross domestic product growth over the coming years.
"We expect annual average growth to reach around 3.5% in early 2015 before settling to just under 3%."
Tuffley expected that the value of the New Zealand dollar would start to ease slightly over the next few years.
"If this occurs, then tradable inflation will likely pick up at a time when non-tradable inflation will be elevated. This will push inflation pressures back into the upper half of the RBNZ’s 1-3% target band."
14 Comments
Nick Tuffley is wrong and has a poor track record of forecasting house price pressures. A lot of economists are like equity research analysts - their recommendations flex to suit whatever the share price is on any given day.
It would be interesting and helpful if interest.co.nz did an analysis of what each bank economist said house prices would do at the beginning of each year and what actually happened going back over the last 5 years. Back in mid 2011 and even at the start of 2012 when it was clear pressures were building economists were all saying house price growth of ~3%. Now that house prices are growing in the double digits it is fashionable to forecast they will continue.
Others will have deeper suspicions on why ASB in particular are forecasting bullish growth (ie - to keep those panic buyers in the market, and making more money for the bank in the short term).
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What makes you think bank economists are reliable sources of insight when it comes to residential property?
A bank's income is dependent on its loan and deposit book. If an economist in a bank was to say something that would suggest property is too risky or a "no go" they may come under fire from senior management because such a view suggests people shouldn't borrow.
Sadly I have seen similar things happen before in banking. For example, an economist in one bank I worked at had to change his favourable views of the resources super profits tax on the Australian economy in a report after it was released because the mining industry complained to senior management about his views.
Not all were saying expect low house price growth - Tony Alexander from BNZ has consistently been saying there are not enough houses in Auckland so prices there will rise.
I think Nick is saying, if you live in Auckland, hold on to your house until 2015 because it will be worth 40% more and then the Unitary Plan will have been notified so it might even be worth more again being able to build to 15m or something.
It will all depend on interest rates. If we look at the USA, mortgage rates have been going up which has now put slower growth appreciation/ brakes on the housing market from which have come of a very low level to income ratio. Yes there is much more supply, but given that mortage rates in NZ have been rising on fixed rates due to higher funding costs there will be a point when rates and housing affordability become a greater squeeze in the cities for margin growth going forward. You might be lucky and house prices stay elevated for the next couple of years, but any any events happening in Europe, Asia , USA, Middle East can easily turn the tide the other way and quite quickly of which NZ will have little control. House prices in Canada, Australia, NZ and UK all have the same problem in the main cities of elevated house prices and have similar issues fo housing affordability.
Astute observation there Muppet.
Just think of Baghdad in 1991. When the Americans came storming in local buyers were buying up large, anticipating a better economy under a new leader.
And property prices have started rising in Egypt, in anticipation of better times ahead.
Beirut too... 'The Paris of the East' now.
We expect consumer spending will continue to recover over the coming years, as households feel more confident in light of higher house prices and improving labour market prospects.
Wow, these economists are so simplistic!
Higher house prices WILL create extra consumer confidence amongst some, but it will also lower it at the same time. That is, first home buyers wil have less disposable income as they are spending more on housing. Additionally, people saving for a first home will have to save harder for the necessary deposit, which will also dampen consumer spending. Overall, I'd say there is likely to be no net lift in spending, and possibly a decline (older people - typically the ones with more housing equity and more liekly to feel "confident" - typically spend a lot less than younger people with families).
As to improving labour market prospects, what is the basis for that???? Fewer opportunities in Aus = more kiwis staying home = more pressure on a limited pool of jobs = higher unemployment. Where are all the new jobs going to come from? What sectors / industries are likely to see significant growth in next few years? There will need to be some significant growth to compensate for the greater labour maket competition.
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