The housing market is improving with sales volumes rising and pent-up demand in the North Island property market. Turnover is expected to rise, but don’t expect house prices to rise strongly.
Shamubeel Eaqubb is principal economist at New Zealand Institute of Economic Research.
Population growth is driving demand, rather than borrowing-fuelled speculative investment, which will be a much better story with more stable prices. There will be fewer investors and more owner occupiers as a result of a lack of capital gains. Capital gains will be hard to come by as house prices are unaffordable.
The big driver for the housing market over the past year has been low interest rates. This has lowered the cost of debt and improved the affordability of mortgages. The Reserve Bank has cut the official cash rate (OCR) to 2.5 per cent. This means people on floating rates are paying around 5.75 per cent, which is very, very low compared to the 8 per cent rates we were used to in the past. We would still urge prospective borrowers to budget a mortgage on 8 per cent, rather than current low rates, to avoid future financial distress.
The housing market is stagnant despite very low interest rates. Typically we borrow more when interest rates fall but during the recession, people have turned from borrowing a lot of money, to paying down debt. Due to job losses and a lack in confidence, people are not so sure that property is the "no brainer" investment it once was. Like our grandparents, saving is back in fashion.
Activity in the housing market at the moment is not what it was. It is a mix of people not wanting to borrow and banks showing caution - it's been a double whammy.
We have seen some improvement in household saving, with big efforts in debt repayment. Many kept their mortgage payments the same, even when interest rates fell. Paying down principal means when interest rates rise, these borrowers will be in better shape. This means we will have a more sustainable recovery.
Meanwhile, we are starting to see a divergence between Auckland and the rest of the country. In Auckland, the rate of new home building has been quite low but the population growth has remained robust. This exciting city is the landing place for most international immigrants so there is always demand for housing.
Auckland is an economic hub with a solid demographic which is always growing. We are now starting to see quite early signs of housing shortages. Barfoot & Thompson is saying rents in Auckland are rising by 4 or 5 per cent or a little bit higher, compared with 7 to 8 per cent in the early 2000s. When there are auctions for rentals, we will know for sure there is a shortage.
The biggest barrier to a further boom in house prices is affordability. National house prices have not fallen much from the peak in 2007. In Auckland, the typical selling price is now back at the peak levels. Incomes have not grown much and housing is still unaffordable.
Things have not really improved for first-home buyers either, because house prices have not really fallen. The question is whether you think home ownership is the best option for everyone. Home ownership in New Zealand is about two thirds, not particularly high compared to the rest of the OECD. Low interest rates do give first home buyers a leg up, but are they confident that they can meet the repayments when mortgage rates go up to 8 per cent?
House prices are still very high relative to income. It's not affordable for us to pay more and more. In New Zealand we don't earn a lot of money and we don't save very much. Houses cost round five times the income of the average household. Are house prices going to go higher in the next few years? We are not seeing incomes rising very strongly. Our view of the economy is, yes, we are coming out of a long recession but we don't expect the recovery to be immediate. The economy and income growth that we had in the past decade is hard to see. And the fundamental support is not there - incomes.
2011 is going to be a transition year, going from a quite flat path, not going backwards but not been making progress. The Christchurch earthquakes sapped the confidence factor but the pall is lifting. Next year, the outlook is more optimistic. We will be seeing improvements in house sales, retail sales and a positive rural economy.
* From the New Zealand Herald's quarterly 'Property Report' - a guide to house prices and great places to live.
