Chinks showing in housing market

ASB chief economist Nick Tuffley says expectations that house prices will rise retreated over this three month period, after rising steadily over the preceding year.

In the latest survey 47% of respondents expect higher house prices compared to 61% in the previous survey.

Meanwhile the number of people expecting lower house price more than doubled from 6% in the previous survey to 15%.

A second key finding in the survey is that over the past two quarters people have become less inclined to view now as a good time to buy a house relative to the start of the year. The key number here is that the percentage of respondents who said it was a bad time to buy increased from 28% to 37%.

Tuffley says the falling confidence ties in with statistics which show the housing market is starting to soften and lose momentum.

He says the price expectations component of the survey has generally been a good leading indicator of house price growth trends.

Over the past year the strong lift in price expectations foreshadowed the latest housing pick-up.

"Price expectations are now turning down noticeably, which points to some unwinding of the recent spurt in house price growth."

The good news for investors is that the momentum has been strong for many years and the bank is predicting the slowdown will be “protracted”, but “relatively mild”.

“A tight labour market will give the market some insulation,” he says.

Tuffley says the growth has been way above historical levels.

Over the past 45 years house prices have increased on average by 2.8% annually above the inflation rate. However over the past 10 years the annual increase has averaged 5.6%, and been double that rate over the five years of the housing boom.

Consequently the housing market is looking stretched.

Respondents to the survey expected an increase in the official cash rate (which happened last week). ASB, like other commentators says that interest rates will be a key factor which slows the housing market.

“There are early signs that these higher interest rates are reducing appetites to borrow, and we expect the impact will be noticeable over the next few months,” Tuffley says.

He says that debt servicing costs will remain for a couple of years as people tend to fix rates for two year terms.

Migration is another factor negatively impacting on the market. In the past housing booms have tied in with spurts in annual migration. The level of net inflows currently is around its 15 year average (12,500 a year), compared to the peak levels of 42,500.