People confident house prices will rise

A net 55% of respondents are expecting house prices to increase, up from 44% last quarter. This result, which follows the marked jump up in the preceding survey, is in line with many of the housing statistics that show the market gaining further steam in 2007. The housing market has been clearly gaining momentum since late 2006, and the price expectations of the latest survey suggest this momentum will be sustained.

Expectations that house prices will rise are noticeably stronger in Auckland than the rest of the country. The Auckland region saw relatively subdued price increases in 2006, but the region’s house price growth has now started to strengthen in line with other urban centres.

However there is some solace for the Reserve Bank, with the survey reporting a growing wariness over whether now is a good time to buy. There are signs of increasing awareness that economic fundamentals may catch up with the market before too much longer. This may stem from the impact of recent increases in the Official Cash Rate (OCR), along with an increased proportion of respondents expecting interest rates to rise further in the next 12 months.

Overall, more respondents believe it is not the right time to buy a house. When asked if now is a good or a bad time to buy a house, a net three percent of respondents reported they believe it is a bad time to buy a house. That represents a considerable change from the January survey, in which a net seven percent felt it was a good time to buy.

Interest rates are obviously on people’s radar, with mortgage rates having risen rapidly since the start of the year. The recent jumps in mortgage rates will see those rolling off fixed term loans facing a noticeable jump in their interest bill and should also impact on home buying decisions.

In the wake of the March OCR increase a net 65% of the survey’s respondents believed interest rates would rise again during the year.

It is too early to tell, but the recent OCR moves may have been substantial enough to have some bite. Debt servicing costs have risen considerably in recent years, but the point at which debt servicing costs become a definite constraint on decisions to borrow further does not seem to have been reached.

“I expect the housing market to continue to be robust in the short term, but the underlying fundamentals are not as supportive as they were a couple of years ago. In particular, affordability is increasingly stretched”, says ASB’s Chief Economist, Nick Tuffley.

“Inevitably house prices will flatten for a period, allowing the fundamentals to at least partly correct the overextension of house prices and debt servicing relative to incomes. My advice is that when purchasing, leave a buffer in your budget to allow for higher debt servicing costs, and other unexpected expenses.”