Buyers in before expected price rise

By BRIAN FALLOW

Confidence in the housing market remains high, despite rising interest rates.

Although confidence slipped in the ASB Bank's latest quarterly survey, a relatively high proportion of New Zealanders still believe now is a good time to buy.

A net 49 per cent of respondents in the March survey think it is a good time to buy a house, down from 56 per cent in December.

In Auckland the decline was from a net 62 per cent positive in December to 51 per cent now.

ASB chief economist Anthony Byett said confidence was at a good level considering a steep rise in interest rate expectations. A net 42 per cent expect interest rates to rise, up from 11 per cent in December.

In Auckland the turnaround has been even more dramatic, to 53 per cent from a scant 7 per cent in the previous survey.

The Real Estate Institute says the volume of sales in February was 42 per cent higher than February last year and the highest since March 1996.

The explanation for the continuing robust confidence in the market despite the interest rate outlook lies, Byett believes, in expectations of house price inflation.

A net 41 per cent of respondents are expecting house prices to increase, up from 22 per cent in December. In Auckland the rise is from 9 to 52 per cent.

"We ask why they think it is a good time to buy. Last year most of the responses were to do with low interest rates, tied in with reasonable house prices. There was a sense you were getting a bargain," Byett said.

"This time it is not about interest rates. Prices are still seen as favourable, but behind that seems to be this expectation that prices are going up so it is best to get in now before it happens."

There was also a pick-up in interest in property as an investment.

Supporting that perception is a 5 per cent annual increase in median rents nationwide in January, says Massey University's real estate unit, and anecdotes of rental shortages in Auckland.

ASB's own estimate is that house prices will rise between 5 and 10 per cent this year nationally, and slightly more in Auckland.

The fundamentals do not support the idea that we are in for a repeat of the overheated housing market of the mid-1990s, with several years of double-digit house price inflation, Byett believes, even though migration numbers are very similar and the volume of house sales is getting back up to similar levels.

He does not expect the monthly net inflows of migrants to continue to increase as they have over the past year but also sees no reason for them to fall off much.

Government policy is to attract around 45,000 immigrants a year, give or take 10,000.

"I don't see any problem meeting that target."

The other major driver of net migration flows is New Zealanders' comings and goings with Australia. Typically the big swings in those flows occur when the two economies are out of sync, but they are both likely to be growing at a steady sustainable rate over the next few years.

On the supply side the pick-up in construction of new housing has been much more prompt than it was in the early and mid-1990s.

"We have already seen building consents pick up. It has by no means peaked. That will suppress large price increases," Byett said.

The Reserve Bank is forecasting about a 20 per cent increase in house building over the next year.

"What is happening now I don't think will unduly alarm the bank."

Another crucial difference between now and the mid-1990s is that households are already carrying much higher levels of debt in relation to incomes.

Their willingness and ability to ramp up debt is expected to be less this time around.

Does that increased level of household debt mean that the Reserve Bank would not have to raise interest rates as much to get the same impact on spending behaviour?

Unfortunately no, says Byett.

More than half of mortgage debt these days is in the form of fixed-rate mortgages, upon which New Zealand monetary policy has only a partial and indirect effect.

Nevertheless Byett, like other economists, expects the interest rate cycle to peak at a much lower level this time than in the mid-1990s. He sees 90-day bill rates peaking at 6.5 or 7 per cent by the end of the year, which would imply floating mortgage rates of 8.9 or 9 per cent.

Over the next five years the floating rate should average 8 or 8.5 per cent, he believes, down from its average of around 9 per cent over the past five years.

He says with enough competitive pressure on banks' margins, it might come down even more than that.