Bernard Hickey: Caution on a housing 'boom'

Prime Minister John Key and Finance Minister Bill English have signalled willingness to change the tax system. Photo / Mark Mitchell

Homeowners may be tempted to order champagne for New Year celebrations after predictions of a rise in house prices next year.

The housing market avoided Armageddon, but it's too early to crack open those bottles. Here are five reasons to stick to sparkling water instead.

1. Tight bank lending

Some say the boom is back, but they haven't looked at how banks are lending. At the peak of the boom, they lent an extra $1.5 billion a month to buyers and homeowners. That is down to about $500 million because banks can't find cheap money easily on international money markets.

Last week ANZ National was the first New Zealand bank to sell a long-term bond on international markets without a government guarantee. This is the first time in 18 months that our banks have been able to access these markets and it cost at least four times more than it did before the global financial crisis.

They're also being blocked from accessing those markets by a new Reserve Bank policy restricting banks to having 65 per cent of their funding from local, long-term sources rather than short-term foreign sources.

That ratio is set to rise to 75 per cent over the next couple of years, forcing banks to keep prices high and not lend too fast. Loan approvals have been sluggish despite the spring and talk of recovery.

2. Higher interest rates

Floating rates are less than 6 per cent and the best 18-month fixed rates are around 6.5 per cent, but they won't stay there. Markets are expecting the Reserve Bank to start increasing the official cash rate from March by 2 per cent to 4.5 per cent by the end of the year. That would increase floating rates to just under 8 per cent and fixed rates to more than 8 per cent.

That will dampen price growth particularly for first homes and rental properties where loans traditionally make up a high proportion of the purchase price. Many have switched to cheaper floating rates from fixed rates, which means they will be more exposed to hikes in the OCR more quickly. The proportion of homeowners on variable rates has doubled to 24 per cent in the past two years.

3. Tax reform

Prime Minister John Key and Finance Minister Bill English have signalled willingness to change the tax system. They have said they won't break election promises, but that still leaves open the possibility of a land tax, some form of tax on equity invested in rental property, the removal of depreciation tax breaks on housing or restrictions to offsetting rental property losses against personal income.

It also leaves open the possibility of evening up the top personal tax rate, the corporate tax rate and the family trust rate at either 33 or 30 per cent.

Westpac has forecast changes like this would cut house prices by as much as 16.9 per cent.

Uncertainty about the tax environment could lead investors to put off purchases.

4. Affordability

Prices are overvalued compared with incomes and house prices in other countries. The multiple of the median house price to median incomes remains around 4.5, above the level of 3 seen as sustainable.

5. Migration turnaround

Net migration in the year to November sextupled to its highest level in five years, but largely because New Zealanders stopped leaving in droves.

Departures fell 27 per cent in November while arrivals actually fell 2.4 per cent.

That trend is likely to turn around next year as the Australian economy heats up and pulls Kiwi workers across the Tasman to jobs with higher wages.

That will suck some demand out of the market.

- INTEREST.CO.NZ