Asked to forecast the outlook for the housing market this year, an economist recently made an important point. Prices can continue to rise, he said, when a market runs out of steam. In other words, rising prices might not be a sign of plenty of activity.
Prices can rise, or at least stay high, because sellers have withdrawn stock, creating high demand for fewer houses on the market. The reason sellers may be deciding not to put a house on the market at the moment may be that they suspect prices will fall if too many of them do so.
If that is so - and there is reason to think it might be - this is not a good time to be buying a house in Auckland or other desirable locations. Not only are prices still high but there is a risk they will fall. It is also a near certainty that interest rates will rise this year and beyond.
Last week the country's largest real estate agency, Barfoot & Thompson, reported that its median selling price last month was 5 per cent up on the previous December but the number of houses it sold was down by 9.4 per cent on December 2015.
At the same time the company had 3270 properties on its books, up 35 per cent from a year earlier. It finished the year with more stock unsold than it has had at the end of the past four years.
This means sellers are not withholding stock but they are asking more than buyers are prepared to pay. At some point they will lower their expectations and prices will drop. That is what markets call a "correction" and it can be a good sign, reflecting an increase in trading at lower prices. A good many of the buyers in that sort of market should be first-home seekers because it offers less likelihood of capital gains.
Barfoot & Thompson managing director Peter Thompson believes residential house prices have stopped rising. His company's average sale price increased by 8.6 per cent last year, the lowest rise in four years. In 2015, the average price increased by 13.9 per cent; in 2014, that rise was 10.3 per cent and in 2013 it was 11.1 per cent.
So prices appeared to have peaked in 2015. In October that year the Government brought in a two-year bright-line test for capital gains tax and tax registration requirements of foreign buyers, and in November the Reserve Bank further restricted bank lending with loan-to-value limits on investment property in Auckland. But after a lull over last summer, prices took off again in March.
Could the same thing happen this year? December and January typically see a slower turnover of houses. After the summer holidays, activity increases.
But one thing has changed between last year and this one. The United States Federal Reserve, which put off scheduled interest rate rises last year fearing the US economy was not as robust as it had thought, lifted its rate in December and projected three more rises during 2017.
New Zealand retail banks had already indicated they were facing higher rates for their wholesale borrowing overseas and needed to reduce their exposure to household debt. Rising interest rates, not house prices, could make this a nervous year.