Infometrics believes house prices will fall in the second half of this year to levels that will be lower than they were 12 months earlier, putting the dampeners on consumer spending.
The economic consultancy's latest forecasts show house prices finishing the year down 2.7% compared with where they were at the end of last year.
"The emergence of flat or falling house prices within the next few years will undermine consumers' willingness to spend, while the discretionary portion of households' budgets will be squeezed as interest rates gradually rise from their historic lows," Infometrics Chief Forecaster Gareth Kiernan said.
"The result of this squeeze is particularly weak growth in household spending from 2018 through to early 2021, with per capita growth nationwide holding below 1% throughout this period" he said.
The effects will be particularly acute in Auckland.
"To put Auckland's household budgetary challenge in perspective, an increase in mortgage rates from 5% to 6% adds almost $200 to fortnightly repayments on a 25-year mortgage for someone who has bought an average house with a 20% deposit," Kiernan said.
That could see many people working longer hours or looking for other sources of additional income to help pay the bills.
"Surging house prices have driven debt levels to record highs and it seems that some of the cautionary lessons learnt during the Global Financial Crisis are already being forgotten," he said.
"People that have heavily leveraged themselves to purchase property, most particularly in Auckland, are likely to find that increasing debt servicing costs cause a significant degree of financial stress.
"Re-entering the workforce or taking on additional hours to boost their income shape up as one way that people can adapt as mortgage rates track upwards."
And in spite of the housing shortage, Infometrics expects the number of new homes being built to decline over the next year.
"The safety net of rising house prices encourages developers to push ahead with new projects, safe in the knowledge that possible building cost overruns will be covered by higher sale prices at the end of construction," Kiernan said.
"But with the wind having been taken out of the housing market's sails, that financial buffer looks to be less assured.
"Our residential construction forecasts see the annual new dwelling consent total slipping back from its current level of 30,162 in the year to February 2017 to below 29,000pa in the March 2018 year."
However, while Infometrics sees house prices and building consents sliding back, they expect inflation and interest rates to creep upwards.
"Over recent months we have revised our forecast of inflation during 2017 up by 0.2 percentage points to 1.7%," Kiernan said.
"Although an upward revision of of 0.2 percentage points does not seem like a lot, it hints at the emergence of greater price pressures, both domestically and internationally.
"Against this backdrop, the Reserve Bank is likely to begin raising the Official Cash Rate by the middle of next year."
Infometrics is also forecasting further increases in net migration, which it expects to peak at a net gain of 73,436 people a year in September, and then remain at elevated levels for the next five years.
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45 Comments
... oh come on Infometrics ... buck up boys , and join the party ... we've not so much forgotten the lessons of the GFC , but realized we're totally immune to them ...
If it all goes to hell in a hand-basket , we can rely on the Gnats to bail us out , at the tax-payers' expense ...
... and until such time , we're into the deep end of the property pool ... hoovering up the goodies , and flipping them faster than the Russian gymnastics team on steroids ...
The mainstream media are now starting to consider the effects of mortgage stress and flat wages growth on housing prices, and I've started seeing the dreaded 'bubble' word in the last fortnight in both NZ and Australian mainstream media, something that simply didn't appear previously. The mood is slowly changing and the euphoria is going off real estate, I think.
Nonsense, Jetliner!
There's nothing new about the "bubble" word. There's been constant talk of a "housing bubble" for many months now. It's practically impossible to avoid mention of it.
I suppose you've just found out that Bill English has replaced John Key as Prime Minister......
Today got a second letter from Westpac with another little lift in the Mortgage rate. Not a bother as the debt is about 10% of equity, and there is good cash flow from productive properties we use ourselves. Current track is that mortgage would clear in about 3years.
But but but. There have to now be some people who feel that first squeeze about the throat. And it's only just started. If you are mortgaged to the hilt, struggling to pay it anyway, which also means you have no capacity to reduce it, you have no where to go. No where to go at all.
And the problem with such high house prices is that anyone entering the market is going to experience that immediately, and most probably for the term of the lending (most of their working lives).
It basically paints a very poor economic outlook/future for the country unless there is a significant drop in the capital value of housing.
Indeed. There are always those who get themselves donkey deep in debt.
That's something that will never change. There are always those who are their own worst enemy, when it comes to managing finances. Nothing can be done about that.
As my grandfather used to say, "You can lead a donkey to water - but you can't make it drink". And human beings are no different.
This is not even a story , everyone knows that when a market over-extends itself , the correction on the way down is often also quite severe .
What they are saying is the pull-back will see 2016 gains being reversed ( or lost ) , but the gains for the preceding 5 or 10 years will not be lost , nor will gains of the past 30 years be reversed ( for people like me ) .
Its academic if FHB's have negative equity by 2018 , they are there for the long -run anyway , and the losses will only be crystallized if they are forced to sell.
Dont panic , whatever you do
Yes - the Auckland housing market could soften a bit over the next few months.
But, as always in the past, it will gather strength and take off again.
Auckland is an excellent long-term hold. There's enormous (and growing) underlying demand for good property in Central Auckland. Just think how many people would love to live/own in areas like Ponsonby, Freemans Bay, St Mary's Bay etc and not have to worry about travel times into the CBD. Alternatively, think how many people would love to have their kids in GZ schools.
If prices drop a bit in the short term, then there will be an opportunity for some. But, remember, the short term doesn't last forever......
How simply PPositive you are "to the point"
It isn't just my opinion that says the world is in a different place than previously history
Isolation is no longer going to save a country from a 21st century interconnected world which happens to hold more debt than any time in history.
Keep hugging those positive thoughts though
So you would rather work.
I can understand if its your own business, business is fun and stressful.
But would you if you had millions. Wouldnt you want to spend time with your kids, your family. Travel overseas, watch the rugby, play sport, go to the Masters, go surfing. Shopping in Europe, Sydney. I love life, not work.
I meet great ex colleagues after work or in weekend, now friends. As for colleagues they are just that colleagues. My true friends are made at school, during sports, and the odd time having a few beers with good like minded colleagues, having some banter.
I have meetings with people and talk about boring geeky stuff, and I have a rapport with them but they are not true friends, where I would want to spend time away from my true loves in my life, my kids family and friends. I love life, I love being outside, I love experiencing new things, not talking about boring geeky stuff, with people who only interest we have is paying bills, and pleasing the boss.
Ahaha sure. I bet you could count the multi multi millionaire 9-5 office slaves in Auckland on one hand.
Anybody with wealth to burn like that and a brain won't be living in the centre of the rat race to lessen their commute.
They'll be living somewhere else more pleasant for less money and enjoying life.
We are talking about greater fools with millions in actual hard cash to pay for these houses to commute from, not paper millionares from who are only so from historical house price inflation from a piece of dirt they already own.
I mean fair dice, you shovel manure in here for reasons, but at least put a bit of effort into making it plausible.
A lot of people like to live in a nice leafy suburb close to an international airport. Family members may go to work or study locally. There are a lot of good reasons to live in Central Auckland. It also has a proven record for being a good location to buy property. There is nothing foolish about buying property in Auckland at all. Currently the foolish ones are those that didn't buy when they could.
"A lot of people like to live in a nice leafy suburb close to an international airport. "
I wouldnt say a lot. Only the ones that can afford over 2 mill and I think thats on the cheap side when your talking Central Auckland.
How many millionaires do we have in NZ or people that are willing to fork out these prices. Unlike Sydney, London, Paris, New York we dont have the huge number of wealthy to keep it propped up, and keep it going higher. Our wages are pitiful compared to these places.
This prediction is no more than crystal ball gazing. No account whatsoever is made of unforeseen circumstances. (Which of course is understandable).
But in my view it is no more than a very mild meek baseline of what may happen if the economy/ immigration etc just trundles along on its existing trajectory. As such its value cannot be overstated.
This prediction would be completely and utterly blown out of the water if any number of unexpected perturbations real or imagined were to eventuate.
An under supply of property will continue, the RMA will continue to make things tough for developers and Labour will be in typical expansion mode, particularly in Wellington. I still find it amusing how they are trying to fix the ‘housing problem’ by the same policies which failed them in the early-mid 1970s and put house prices up by the largest % amount ever even with inflation. Bring them in I say!
I do also find it interesting that demographics are not discussed in any of these predictions. Demographics are one of the few things that can be accurately measured and predicted. We know exactly how many baby boomers there are, we have very accurate and predictable statistics on age-related spending habits. Human beings have been shown to be highly predictable in their spending patterns over a lifetime across all cultures and countries.
Boomers make up 14% of NZ population. Without huge net migration, that number would be a lot higher. Net migration may well continue to boom, but protectionist politics may find its way to NZ as it has in the US and UK. Winston may get his time in the sun.
Baby boomers are retiring. Retiree's spend less. They tend to down size. This is a western world phenomenon. And I cannot understand for the life of me, why this is not factored into forecasting over the next decade. Currently, a lot of boomers have (on paper) incredible housing wealth. Many have more than one property. But demographically, as we age, we very predictably consolidate our wealth and want less stress. Yes, even property investors retire, cash in their properties and look to a quieter life as they age. Tenants can be a pain in the arse, maintaining multiple properties takes work.
So what do people think will happen when the boomers start to retire? Start downsizing? Start selling their additional properties?
If we pay SOOOOOOO much attention to the rate of building and supply/demand effect of migration and the building rate, why do we ignore a massively predictable factor like baby boomer retirement?
Good point. Some in the retirement fund world are already considering the 'great rotation' by retiring boomers out of financial markets into cash to spend, and what effect that'll have long-term on share and bond markets. Your points about the effect on housing are thought-provoking, because they reflect part of the same issue.
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