Big drop in house sales on cards

By BRIAN FALLOW

The surge in house sales in March and April has abated and confidence in the housing market has fallen, the ASB Bank's June quarterly survey, released today, shows.

A net 35 per cent think it is still a good time to buy a house, although that number is down from 49 per cent in the March quarter and 56 per cent in December.

The Real Estate Institute reported a 2 per cent decline in dwelling sales in May.

But that was down even more in seasonally adjusted terms, ASB chief economist Anthony Byett said. Anecdotal evidence pointed to an even sharper decline in June.

But Byett does not think it is all downhill from here.

Boosted by immigration and robust income growth, demand is still strong.

"But there's not the supply. We know there will be more housing built but building consents are still not at the levels needed to meet demand," he said.

The Government's residency approval target for the next three years has recently been set at 45,000 a year.

"That is less than last year [53,000] but is consistent with a net migration inflow of 20,000 to 25,000 people, a figure well in excess of the net 10,000 a year lost in the three years before 2001/02," Byett said.

The turnaround in the migration trend should mean between 5000 and 10,000 new dwellings are needed each year, most of them in Auckland.

"While building activity is increasing, the step-up to a new level of building activity does not appear to have been completed yet," Byett said.

"So the pressure is still on. It all points to further upward pressure on house prices and rents."

Respondents to ASB's survey think so too.

A net 54 per cent think house prices will rise, up from 40 per cent in March and 22 per cent in December. In Auckland a net 63 per cent expect prices to rise, up from 52 per cent three months ago.

The high expectations of price increases were consistent with real estate agencies reporting low listings and good buyer interest, Byett said.

Overall confidence in the market tends to be the mirror image of interest rate expectations.

"While wet weather and an impending election may have contributed to the lower turnover of late, it would appear the Reserve Bank has done its job. It has quelled what might otherwise have been a runaway housing market," Byett said.

Fears of residential property bubbles that might be near bursting have been growing in Australia, Britain and the United States lately.

But research by Bank of New Zealand economists concludes that similar fears about New Zealand would be misplaced, at least at this stage.

"The average New Zealand house price is 5.5 times the average pre-tax income for a wage and salary earner. While this is well up from the low of 4.4 times reported during the last recession it is well below the six times reported in 1997, and has been on a declining trend," BNZ economist Stephen Toplis said.

Nor do house prices look stretched when compared with rents.

The estimated price/earnings ratio has not shifted much.

It had if you looked at total rents, Toplis said, but they were heavily influenced by the move to income-related rents in the state sector.

"If you look at private sector rents only, price/earnings ratios have been relatively steady since the mid-1990s."

The recent surge in house prices follows a period of stagnation. Over the six years to the end of 2001, house prices rose 16 per cent (altogether, not per annum) in New Zealand compared with 33 per cent in Australia and 45 per cent in the United States.

In real terms house prices have risen 1.7 per cent per annum since 1990 and 1.9 per cent per annum since 1980.

"This does not look like an exceptional return on investment, albeit still competitive with other returns on an after-tax basis," Toplis said.

"Lending for housing in May was up 8.2 per cent on year earlier levels. It is on an accelerating trend, but it falls well shy of the double-digit growth reported through 1999 and in the mid-1990s. Moreover household debt, which is dominated by mortgages, appears to be stabilising. Debt servicing costs are near their lowest levels since the early 1990s."

The combination of rising prices and rising interest rates is reflected in a steep drop in AMP Bank's home affordability survey for the June quarter. It fell 18 per cent in Auckland and 15 per cent nationwide.