House prices nationally will start falling in about two years, Westpac economists believe. And they say the period of "modestly" falling prices might last until about 2018.
The economists have put out a paper "Eye on the horizon", which gives their economic forecast for New Zealand for the next 10 years. They stress that the forecasts "aren't meant to be precise predictions".
Westpac senior economist Felix Delbruck said the economists were often asked for longer term economic forecasts, so, "in this bulletin we respond to those requests by extending our forecasts out to 2023".
In general terms the economists are picking the current economic upswing to continue through 2015, but for growth to slow in the second half of the decade. GDP growth is tipped to be slower (2.1% by 2023 versus an average of 3% in the past 20 years) as a result of an aging population, inflation is seen as averaging above 2%.
High exchange rate
Long term term interest rates are tipped to be slightly below historic averages, but the exchange rate is expected to remain historically high. Labour productivity growth is tipped to only remain at its long term average levels of about 1.2% a year.
It's the views on house prices that may raise some eyebrows, however.
Westpac economists have long held the view that once interest rates started rising the current heated housing market would start to cool.
Recently they went further, forecasting cooling housing market conditions from about November onwards. And now they've gone further still.
The economists are picking that house price rises as measured by QV will fall from current levels to 6.5% by the end of next year and then just 1% by the finish of the following year.
Two years of falls
They then pick that, starting with a fall in prices in the last quarter of 2015, prices will continue to fall through 2016 and 2017, by up to 2% on an annualised basis, before positive momentum starts again during 2018, gradually picking up and seeing house price rises of about 4.6% a year through to 2023.
Delbruck said that the Westpac economists expect mortgage rates to average about 7% in future, compared with an average level of 7.5% over the past 10 years.
"That has important implications for the housing market," he said.
"We expect that mortgage rates will have to rise above this new average to keep inflation in check. As mortgage rates rise, they will crimp housing affordability, worsen net returns for landlords, and skew the rent-or-buy decision away from buying.
Many unknowns
"Of course there are still many unknowns for house prices, such as what will happen to the tax structure over the next ten years, or to what extent new building will relieve pressure on rents. But even if (as we assume) rents grow at an average rate of about 4% a year, and there are no major tax changes, we wouldn’t be surprised to see house prices actually fall by 2016, and to fail to keep pace with inflation through the second half of this decade."
In terms of the economy in general, Delbruck said the Westpac economists were expecting the upswing to continue for the next couple of years.
"On our estimates the Canterbury rebuild has only reached about half its peak pace. A building response to the housing shortage in Auckland has only just got going. Construction activity is likely to continue accelerating through to 2015, eventually dominating the economy to an extent not seen since the mid-2000s.
Less spillover
"That said, we don’t expect the spillovers from this construction boom to be as spectacular as in the 2000s. One reason is that we expect interest rates to gradually rise over the next two years, and the housing market to slow. Current low interest rates are a response to the slow global and local recovery from the 2008/2009 recession, but they are not a ‘new normal’."
As construction activity continued to build, interest rates would have to rise to keep inflation in check. The economists are picking a Reserve Bank Official Cash Rate of 5% by mid-2016.
They are picking that the Canterbury rebuild will peak by 2016 and then "in our view, it’s safe to expect an economic slowdown of some magnitude".
A drag on growth
"As reconstruction activity in Christchurch slows, it will turn from an engine of growth to a drag on growth. At the same time interest rates will be approaching their peak: by 2016 we expect mortgage rates to have pushed above 7%. In our view, house price rises will be increasingly hard to sustain at those interest rates – indeed, outright price falls will become likely.
"With house prices no longer rising, homeowners are likely to retrench and turn their focus back to managing debt. And while we are optimistic that global food demand will keep export prices high by historical standards, we wouldn’t go so far as to forecast another surge."
42 Comments
Up and down.
But in the end it's only round and round.
Haven't you heard it's a battle of words
The poster bearer cried.
Listen son, said the man with the gun
There's room for you inside.
These predictions are exactly a load of old rubbish. No-one can predict house prices this far out, far less economists.
I wouldn't call myself a perma-bull, but I have good experience earnt the hard way and can assure you house prices in Auckland are going no-where but up in the next couple of years.
I'm not saying they'll never go down, I've not seen anyone say this to be fair, but I'm saying they're not going down anytime soon.
You bears have been predicting this house price fall for so many years now its embarrassing - slap yourselves. If you're this far out of touch with what the market is doing you deserve the pathetic returns you're receiving.
Good work Felix and spot on in my mind.
I haven't read his full report, just this article, so don't know if he differentiates between the regions. The OCR will go up to counter the Auckland and Canterbury price rises, by the time you bring Auckland annual rises down from 20% to 5% it's safe to say that the same blunt instrument (OCR) will move average National prices from annual rises now of about 8% down to -7% annual decrease. Assuming all other factors remain consistent.
If you live or invest outside of Auckland well...
The difficulty is where to put your money. House prices look stretched accept in remote locations, the bond market looks unattractive with the expectation of rate increases, the stock market looks over valued to fundamentals, money in the banks is not safe as the banks could take your money if they fold. where do you put your money? Spread it everywhere in the hope that they all don't go down at the same time. sell the house in the city and buy the house in the remote country with no mortgage and no job opportunities. Only the happy few that made 300% on Xero stocks can be feeling happy at this moment.
Yep....everything is over-priced and at risk. You just have to listen to the likes of Stephen Hulme who are into finance complain on the OBR as "theft" from depositors to know no where is safe.
Huge Hendry said an interesting thing Ive not forgotten, his aim was/is to be a giant amongst dwarfs....ie many ppl are so busy chasing interest that cant see the risk of sizable losses to thier capital and are over-exposed and its getting worse. As oposed to ppl who make little interest but have little exposure...
Some advice from Nicole Foss is cash and cash like things. "cash like things" are Govn bonds with short maturities, but Im in debt with a mortgage and debt always remains...so I pay down my debt.
I wouldnt buy a house in a remote location myself unless it was very very cheap...they are going to drop as well Id suggest.
regards
Steven,
When you consider the Austrialian banks are lobbying governments to guarantee the bonds held by large offshore financial intermediaries (covered bonds) and their derivatives positions, which will be payed out by the funds of deposits, one can't help but conclude that the scheme is designed to absolve the banks of any responsiblity for their actions and offload all the consequences of any failure onto the depositors who are passive bystanders in this whole charade. Its a classical case of principal agency problems and the OBR just magnifies the problems.
I dont agree on the OBR, its there to protect the tax payer it reduces the problems, unless of course you are a vested interest with money there. I find it interesting how so many ppl complain about it not protecting their money when they can leave the bank at any time they choose.
Um the covered bonds are covered by a mortgage pool? or is what you are saying new/different? If so, no it should be guaranteed by a [NZ] Govn.
Well without the OBR we clearly have a moral hazard, but like I said depositors can exit their deposts, its not compulsory unlike a tax payer bailout without the OBR.
regards
"The covered bonds are covered by a mortgage pool? or is what you are saying new/different? If so, no it should be guaranteed by a [NZ] Govn."
Yes, but given the most likely cause of a bank collapse which the OBR is intended for would be caused by a crash in housing price, the value of the underlying assets will be a whole lot less than the face value of the covered bonds. In that case the banks will be forced in its liquidation proceedings to give a greater proportion of their assets to redeem the full value of whats owed to the secured creditor. This means less available to pay out to subordinated creditors, including depositors. Any shortfall between bank assets and liabilities will have to be payed out by unsecured creditors, just like in Cyprus.
@jetliner - that handful of perma-bulls have been right for far longer than the henny-penny brigade on this site. Bet you wish you'd listened to the perma-bulls a few years ago instead of Bernard et al's 30% price drop prediction (no offense intended Bernard - I know you've suffered enough watching your old Auckland property climb in value since you sold it).
If the outcome predicted by westpac is correct this will mean the RB's strategy has worked perfectly. On this basis I have to disagree with the forecast. Yes interest rates are going to be higher in two years but unless all the other issues have been addressed I don't see this being enough to dull demand for houses in Auckland and Christchurch. Given the rate at which we (don't) build houses in this country I suspect there will still be a shortage of houses in Auckland in two years time. The only way national house price inflation can be reduced then is if house prices in the regions crash, as Happy suggests.
I'd be a little concerned if I owned property in the regions. I'd be thinking about selling up and buying in Auckland instead. Should westpac really be forecasting business as usual for Auckland and doom for the rest of the country?
Well, the real house price inflation has only been in the last 15 years or so, and regarding his own house, Bernard may well have had his own reasons for doing what appears illogical to you.
On the other hand, we have rising interest rates, the full impact of the LVR restrictions (which will play out over the coming months), the housing build gathering momentum, as well as the unknowns of the world economy (perhaps keep an eye on things in the US, like potential debt defaults, and China, with its own housing and construction bubbles and municipal debt). Moreover, if ability to service mortageges through increasing wages is unable to keep pace with prices, then this will also have a dampening effect on the market, which we're possibly already seeing.
Despite all this, you and LargeFather below (who brushed off the Westpac economists' opinions in exactly the manner I predicted) have so much confidence that things will keep moving up and up forever more... That's bullish!
Jetliner - I am not accusing Bernard of being illogical. Just because one makes a logical decision it does not mean that they can not be dissapointed (at missed capital gains for example). Many people look back and say "if only I bought 10, 20, 30 years ago..." or "if I had kept that property it would be worth zillions today.." That's not to say selling or not buying was an illogical decision. It's just human nature to reflect upon these things. I believe the wise economists call it opportunity cost.
I would not claim to be bullish. I am simply a realist. Theory is interesting enough but what goes on in the world is often quite different to the theory. I consider the theory but base my decisions mostly on what is happening in the world. Those who think property prices in NZ are going to come down to a 3:1 price to income ratio anytime soon should reflect on the reality in New Zealand, not theory or happenings in other very different locations. “It must be considered that there is nothing more difficult to carry out, nor more doubtful of success, nor more dangerous to handle, than to initiate a new order of things.” - Machiavelli, The Prince
Mach, "The only way national house price inflation can be reduced then is if house prices in the regions crash" that's the likely result of OCR rises. A better way to calm inflation in Auckland is to increase the supply in Auckland.
In saying that, there will always be rises in a growing city, people need to accept that life starts in flats, apartments and terrace houses. Just ask anyone in London, Paris, Sydney, Chicago, or any other western city. One day the "average price" will include apartments and there will be a overnight drop in that figure and affordability calcs. Peoples expectations need to change, and the sooner the better as eventually they'll be forced to.
All we ever hear on this site is about the shortage of supply that is driving price growth in Auckland. However two things have never made sense to me 1) why rents haven't gone up at the same time and 2) the speed at which prices have appreciated. 20%+ annual growth cannot be a function of a sudden mismatch between supply and demand. A good chunk of these prices rises are driven purely by market speculation of continued capital gain ie a bubble. I sure hope I'm wrong for all my Auckland friends who have mortgaged themselves up to the Kahooza. It's gonna get ugly if rates hit 8-9% imho
Yep...agree...
There is a worse and more likely side, a price collapse because we go into a World wide depression aka the 1930s. US houses lost 30~40% just in the GFC alone, I wonder how your friends will handle that size of loss that they will never recover.
regards
Honestly Steven,
You remind me of Michelle Bachman, gleefully awaiting and praying for the end of days.
It's One year to the day since I bought my lovely wee house, \ that you forecast doom and gloom for. Absolutely happy as larry, house over the road much smaller than mine has just sold for 30k over what I paid Am in Welly so not too worries about a massive retrace. House inflation may come down, but I still don't see a massive drop simple supply v demand.
You should really try and cheer up, at least it's a friday.
Jesse, do you live in Auckland? steven, do you?
I just can't understand how people can be so disconnected from reality, have you tried to rent or buy a house in Auckland recently? Yes, economists are disconnected so you should be asking people at the coal face, PIs like me.
Rents are going up but the statistics will lag behind; if I up my rent on a tenant we exchange paperwork but nothing needs to be sent to DBH. None of my tenants have moved in years because they know how hard it would be to find another place. Most new rentals coming to the market are in the cheaper, lower cost areas of the market hence the lag in the stats.
Keep you heads in the sand, pretend it's not happening, I'm well hedged against rising house prices.
It has to be remembered that total return on investment is a combination of rental return and capital growth and that they are inversely related to each other and normally follow higher yield/lower capital growth or lower yield/higher capital growth, with the other two combinations of high yield/high capital growth and low yield/low capital growth uncommon.
In Auckland’s case it’s a combination of 1) capital growth speculation based on a shortage of supply, any rent is a happy by product for many of the investors, and 2) non-resident purchasers whose motivation to purchase could just being used as a vehicle to park some cash rather than in their own financially more risky country. In fact, having any tenant for these type of investors can be a hassle given they cause wear and tear (fair or otherwise). This is why in speculative high capital growth cities (which are also cities that have restrictive zoning policies) you can get an increasingly high vacancy rate, not because the tenants cannot afford the rent, but because the owners prefer to keep the property vacant to preserve its condition. On top of this, tenants can mitigate this increasing lack of supply by increasing (elasticity) the numbers of people in existing rental properties, couples house sharing, children staying at home longer, leaving for Aussie etc. This flattens the rent curve as prices still increase.
In cities that have less restrictive land zoning polices (can build at the rate of demand) and medium multiples around 3, mortgage payments are generally lower than rental payments. Thus rental yields as a percentage of amount invested is higher than in restrictive land zone cities (low supply like Auckland). And because housing in less restrictive land zoning policy cities is supplied at the rate of demand, capital growth is not much more than the rate of inflation. These two factors discourage speculation and encourage longer term rental investment.
So is Felix Delbruck selling his houses? ...... resounding silence from the direction of Westpac Bank
Fletchers are now saying the Christchurch rebuild is now out to 20 years {Best financial return modelling must encourage that]
Auckland has only 1,900 buildable sections, and people are writing there is a housing bubble.
The PAUP [parts of which have applied from 1st October 2013] will help things, but where can the developers obtain finance? And without finance what is going to get built?
http://m.bbc.co.uk/news/business-24537487
The above link explains to some degree the housing bubble on the north shore where the housing bubble in Auckland is most pronounced. Parents in Asia are risking all for their children's education, which includes selling the family home to fund it.
We also had the first version of the unitary plan that sparked a lot of speculative buying in the city areas and there will be a lot of people who bought on the pretence they could develop to find under the paup that is no longer the case.
Where prices go from here is any bodies guess
And the unwanted side effect is the over valuation of the NZ$ which is crippling export development and even the returns to dairy farmers - if they could only see it.
A 10 percent drop in the NZ$ would up the Fonterra payout and the mortgage payments would not be any greater than now unless the sillier farmers pay more for the next farm.
Happy123 - Rentals are a dime a dozen, I dont think you have been checking the market lately?
Im a happy renter, and just moved from a Villa in Mt Eden, the owner moved in after taking care of the rat population but still has the cockroaches to sort out. They had spent a fortune modernizing the kitchen which the rats appreciated.
Looked at 3 rentals, 2 dogs but price is the same as I looked at 2 years ago. Found a 10 year old place in Westmere, North facing, partly furnished, and price cheaper than the Villa in Mt Eden.
Happy to rent, my weekends are mine, also glad I invested in Xero a few years back.
ZanyZ....don't panic Mr Mannnering, your so hysterical I feel I should slap you out of compassion....all the whining in the world won't stop John Boy's slide.....the job creation scheme now seen for the myth it was . People by enlarge are less concerned about CGT and far more worried about finding employment, remaining employed, servicing their mortgage, rent, and putting food on the table.
Hype and fear , are components of the property game , somewhat detached from the reality of Joe Publics everyday life.
We already have capital gains tax in practice, just not in name for all securities trading. The outrage is that it gets claimed at the owner's marginal income tax rate. Only those burnng other's money would engage in such activities - ever wonder why the NZX is the shadow of what it could be.
Hi Fraz, just my own experience, maybe the rat and cockroach end of the market behaves differently :o)
Good to hear it's working for you, the % returns from owning a rental in a upper class area is very low so compared to owning that property your probably getting a very good deal (capital gains ex).
And glad to here your investing in the NZX, I've got almost as much invested there as in Auckland property. I've got about half a dozen positions at the moment that I'd be happy to share. Unfortunately I don't have, and have never had, any Xero shares, I thought they were over-valued at $7. At least I've learned something.
They will not fall, they will do what they have done for the last 50 odd plus years.
housing/ property will Simply go into the regular approx 7/ 14 yr repeating cycle of stable for while till the next cycle kicks off... doesnt take a PHd in ecomonics to know that
PPL have very short memories and stats histories way to short... as I have commented before...
Basically its a common sence, no brainer really.. any big increase, regardlss of the subject is followed by a leveling off period, letting inflation and market influnences catch up, subject to other influneces like supply and demand...
In inflation adjusted terms, at a national level, things are currently not as swinging as they could be - hence the evolving regulatory nonsense being activated by the RBNZ to protect the banks from themselves when a good dose of interest rate hikes a while back would have clinically done the job. Not all home owners are created equal and only the so-called 1% can afford to play in certain pockets of Auckland without payment failure risk at nominally elevated price levels. View graphic evidence courtesy of Colin Riden
Your right that it will spread outside of Auckland but Tokoroa... hmmm... What does a cashed up Auckland BB or PI do after they've made a few hunder K on thier Auckland home... You guessed it, buys the batch. Next places I'll be investing are Coromandel (Pauanui or Matarangi), Omaha, maybe Raglan...
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