Housing market price divergence to slow

Westpac chief economist Dominick Stephens

Auckland house prices have been going vertical while those in other regions have been stagnating, according to Westpac’s latest Home Truths report.

Quoting June’s REINZ data, the report notes that Auckland house prices rose 20% between September 2014 and June 2015.

In comparison, house prices changed by 4% in Wellington, -1% in Christchurch and by between 3% and 7% outside of the three main centres.

While this price divergence is spectacular, in the report Westpac’s chief economist Dominick Stephens says he suspects things are about to change.

This is because plunging global dairy prices, the earlier than expected peaking of the Canterbury rebuild, and falling business and consumer confidence are changing the economic ground the housing market is built upon.

Meanwhile, significant Reserve Bank and government policy changes are set to come into force soon and they will impact on the housing market, Stephens says in the report.

In particular, mortgage lending restrictions for most of New Zealand will be loosened while they are tightened in Auckland and, at the same time, the Reserve Bank is in the process of reducing interest rates.

Stephens says this is a complex set of developments for the housing market to digest and it is very tough to predict exactly what is going to happen.

However, the report’s outlook for housing markets around New Zealand is that:

• Auckland will gradually cool over the months ahead as the economy slows and the tighter mortgage lending restrictions and tax rules hit in.
• Tauranga is already in catch-up mode and, relative to other markets, that is likely to continue for a while.
• Dairying regions, like Waikato and Southland, will be hit by the dairy downturn and housing markets will cool in these regions.
• Christchurch prices will soon start to fall due to rising housing supply and the waning rebuild which might herald a moderation in housing demand.
• For other regions, including Wellington, the outlook is a little more positive as falling interest rates and looser LVR rules might present some modest upside for housing markets.

The report also notes that one of the key drivers of Auckland house prices has been the expectation that the cities population will intensify, which has driven up the price of land.

But it points out that, as the economy cools, ebullient beliefs about what land in Auckland is really going to be worth in the future might be challenged.