Current boom "in one sense" already passed its peak - Stephens. Photo / George Novak
Current boom "in one sense" already passed its peak - Stephens. Photo / George Novak
House prices are still rising but the market is "past its peak" and mortgage interest rates will rise, Westpac chief economist Dominick Stephens said today.
In his latest Home Truths analysis, he also says Auckland house-building is catching up with demand and the shortage will be zero by 2028.
Ina hard-hitting analysis of the market where prices have been rapidly escalating for some years, he agrees that prices are now rising more rapidly than in 2003, and the boom has a way to run yet.
But he says that will all soon stop.
"Home Truths argues that the market will slow in time. That's because mortgage rates will rise and the shortage of housing is being rapidly reduced," says Stephens, who was today appointed to a 10-month secondment as the Treasury's deputy secretary, chief economic advisor, starting later this month.
Auckland's Barfoot & Thompson will this morning release its February data, expected to show continually rising prices but a listings shortage.
Stephens said national house prices rose about 12 per cent last year and accelerated wildly at the very end of the year. The REINZ's monthly House Price Index rose by an astounding 9 per cent in just three months – the sharpest increase on record, he acknowledged.
But low interest rates were the key to such records and that would change.
"Over the past few months mortgage rates have fallen even further than originally anticipated, so our house price forecasts have been revised up accordingly. We now expect a 17 per cent increase in house prices for 2021, on top of the 12 per cent increase from last year," Stephens wrote.
Dominick Stephens forecasts mortgage interest rates to rise. Photo / Craig Cooper
"That said, we think the current boom has, in one sense, already passed its peak. We expect the monthly pace of price increases will trend down from here," he said.
This gradual slowdown would see house prices rise at a slower 7.5 per cent pace next year and zero in 2023, he forecast.
"And eventually, we expect house prices to fall. Far-future forecasts are always indicative at best, but we are pencilling in -4 per cent annual house price inflation over 2024 and 2025."
Mortgage rates will trend higher, Westpac predicted, although the Reserve Bank will make no change to the Official Cash Rate until 2024, but there are still good reasons to expect fixed mortgage rates will rise.
Financial markets are forward-looking and will incorporate expected future OCR hikes into wholesale fixed interest rates ahead of time – in fact, they already are, Stephens said.
"The Reserve Bank's quantitative easing programme and funding-for-lending programme have been suppressing longer-term interest rates, but both will wind down over the coming year or so.
"The Reserve Bank will require banks to hold more capital from mid-2022 onwards. This will drive mortgage rates higher independent of wholesale interest rates," he said.
Changes in the balance between physical supply and demand will soon become a drag on house prices. Residential construction is currently booming at the same time as the population growth rate has crashed, Stephens said.
Since last September, new housing consents rose 16 per cent.
Yet annual population growth was on track to slow from 2.4 per cent last year to a low of 0.4 per cent per annum this year because of the closed border.
"Even after the borders reopen we expect population growth will be slower than before the pandemic, due to tighter government migration policy. And we expect construction to remain strong," Stephens said.
So the housing shortage which had long dogged this country was receding quickly.
The number of people per dwelling was now falling fast and Auckland would be back to 2014 levels by the end of next year. That was a good gauge of this country's housing shortage and indicated under or oversupply, Stephens noted.
Auckland had a shortage of 32,000 houses at its peak, but by next year that would have fallen to just 12,000 houses "and on our forecasts, it will be zero by 2028".
Physical supply and demand was a key factor in house prices during the last 30 years and that was one aspect which was rapidly receding, Stephens said.
The OneRoof quarterly property report out this week said there was good news for people who had owned a home in Auckland since 2014 and not yet sold it. They could be sitting on a quarter-of-a-million-dollar increase, that said.
That publication, free with every Herald, showed exactly how the housing market was performing by giving area and suburb price comparisons.
