Correction on the cards?
Thursday 23 February 2017
Rising interest rates along with slowing migration and population growth could lead to a 12% fall in house prices by 2020, according to one economic forecaster.
By Miriam Bell
New Zealand’s economy is generally considered to be in good health at the moment and Infometrics Ltd’s latest forecast supports that view.
But Infometrics chief forecaster Gareth Kiernan believes the solid outlook for growth masks several economic risks – and Auckland mortgage holders need to watch out.
Wholesale interest rates will gradually rise further over coming months and the Reserve Bank will start increasing the official cash rate by mid-2018, he said.
“Mortgage holders in Auckland look particularly vulnerable to even modest interest rate rises that are likely to occur in the next 2-3 years.
“Debt-servicing costs in the city now take up a greater proportion of income than in 2007, when mortgage rates reached 8.7%.
"A future rise of 1.5-2.0 percentage points in mortgage rates would clearly stretch many borrowers in Auckland and squeeze potential buyers out of the market.”
The rise in interest rates is likely to be one of the factors which leads to a housing market slowdown.
Kiernan said net migration and population growth will be easing at the same time as interest rates start to rise and this cocktail could be the catalyst for a housing market correction.
“Apart from the stresses on the market in Auckland, underlying demand conditions in some other regions do not justify current high prices.
“We see scope for a 12% drop in property values by the end of 2020.”
While commentators generally agree that the housing market has become noticeably cooler over recent months, most are not predicting a major correction in house prices anytime soon.
Rather most commentators are expecting house price growth to continue – but at a significantly reduced pace.
ANZ’s latest Property Focus points out that both turnover and prices are down, while the REINZ Stratified House Price Index fell by 6.2% in January, which is the largest monthly fall since 1999.
ANZ chief economist Cameron Bagrie said this can arguably all be seen in the context of more restrictive macro-prudential measures, recent lifts in mortgage rates and affordability headwinds.
“However, it is hard to see weakness, especially in prices, extending too far, when the demand/supply picture doesn’t look set to normalise any time soon given increasing supply-side headwinds.”
Likewise, in their latest economic overview, Westpac economists said the ongoing need to house a growing population makes it hard to justify forecasting an outright decline in house prices.
“But we suspect the higher cost of borrowing will weigh significantly on the market’s momentum this year.
“We expect nationwide house price growth to slow to 7% this year, and to dwindle further in later years.”
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