Housing set for squalls after golden weather

Confidence in the housing market has tumbled in ASB Bank's latest quarterly survey, adding to the evidence that the housing cycle is at or near its peak.

Only a net 1 per cent of the survey's 600 respondents expect house prices to increase, down from 18 per cent three months ago. A net 36 per cent expect interest rates to rise, down from 67 per cent in January.

Fewer people regard it as a bad time to buy a house: A net 3 per cent are of that view, down from 13 per cent in the previous survey.

ASB chief economist Anthony Byett said the survey was consistent with the lower levels of housing market activity reported in recent months and a slower rate of appreciation in the average house price.

He said the market was likely to continue to slow this year because of higher interest rates, the greater supply of housing and the general economic slowdown.

Any fall in the average house price over the next year or two was likely to be moderate, but the average could mask some sharp falls in individual cases and it could take several years before the average price increased quickly again.

Since the present uptrend began in 2001, the average house price had risen 89 per cent, a huge increase in absolute terms and relative to such measures as income and rents even if not unusual from an international perspective.

But the housing cycle had slowed this year with activity levels returning to near 10-year averages, while house prices appeared to have increased only modestly and even declined in places such as Auckland.

The most authoritative measure, Quotable Value's house price index, was not yet available for the March quarter but, based on the Real Estate Institute's median house prices and ASB's confidence survey, the national average rise in house prices in the first three months of the year was probably between 1 and 2 per cent, Byett said. That would be down from the average 3.6 per cent per quarter rise recorded through 2005.

Even with a bounce in March, sales volumes so far this year have been lower, though still slightly above the average of the past 10 years.

"There has also been a noticeable increase in the time it takes to sell a house, as measured by the median number of days between listing and sale," Byett said.

Fundamental measures like the ratio of household debt to income, house prices to income, and rental yields had been suggesting for some time that the market was stretched.

"But it is really only in the past few months that we have started to see this more moderate rate of house price increases."

In the previous cycle, the peak came at the end of 1997, 5 years after the average price started rising. By then it had risen 55 per cent.

The average price dipped 5 per cent, partially recovered and then went sideways. It took four years for the December 1997 peak to be surpassed. The present cycle, by comparison, has been going for 4 years, and the rise so far has been 89 per cent.

Pointing to a further slowdown this year are weak economic growth and therefore household income growth and the prospect of some job losses, which reduce people's confidence to spend on large items.

"There is also potentially an overhang of houses and sections following the large scale of property development in the last three years," he said.

"And then there is the lagged effect of rising interest rates over the last two years."

More than a third of mortgage debt will roll off fixed-rates over the next year.

The average rate being paid is 7.3 per cent but the rate those borrowers will face on refinancing will probably be over 8 per cent for many.

Although the Reserve Bank is generally expected to start cutting the official cash rate before the end of the year, the impact of that easing on two to five-year interest rates would be offset by two other factors: rising world interest rates and the need for banks to replace a lot of cheap uridashi funding, which is due to mature.

"There's absolutely no danger the banks won't be able to replace it. It's just a matter of at what price. The question is does it take a low exchange rate to entice overseas investors to take on dollar risk or do they have to be enticed by a little bit higher interest rates. I suspect it will be a bit of both."

It was a time for extra prudence when buying a house, Byett said.


The big chill

* Almost as many people expect house prices to fall as to rise.
* Average prices are still rising but more slowly than last year.
* Turnover is down though still a bit above the long-run average.