ANZ chief economist Cameron Bagrie
ANZ’s latest Property Focus report is out and it explores the findings of the bank’s 2016 property investors’ survey.
In the survey, investors generally had high expectations for continuing growth in house prices around the country.
At the same time, nearly a third of investors said the new LVR rules had impacted on their strategy over the last 12 months, and half of this group had not bought a property they would otherwise have bought.
Further, nearly 30% of investors said the new LVRs meant they were less likely to buy again over the next year.
ANZ economists, Cameron Bagrie and Philip Borkin, said the bullish house price inflation expectations suggest investors are not extrapolating from how LVR restrictions have affected their own decisions to how they might impact on the broader market.
“Their concern is obviously that restrictions might stop them jumping on the bandwagon, but there’s little concern that the bandwagon might be slowing down or heading for a cliff as a result of those measures.
“As long as net migration stays high and interest rates low, they may well be proven right.”
However, the higher prices go, the harder it is for them to keep going up, the economists warn in the report.
Given Auckland’s stretched affordability ratios, any further house price increases from here ups the ante on a correction to bring affordability metrics back into line, they said.
While impossible to pinpoint a date, they could see an outright fall in house prices due to higher interest rates or an economic recession.
Alternatively, and preferably, they could see a stagnation of house prices while incomes catch up – although low inflation worldwide makes it unlikely that inflation and incomes would do the work.
The economists said that, in the event of a deep recession, the widespread belief that New Zealand (or at least Auckland) house prices never fall too far could be sorely tested.
Owner-occupier property prices might not correct downward too far, but the same cannot be said for land prices, apartments or investment properties, which tend to move in line with the economic cycle.
Other factors also need to be considered in this equation, the economists said.
While there are numerous roadblocks to house-building on a scale that would rapidly dent house price inflation, evidence is now mounting that the new LVRs are cooling the housing market.
The market might still be tight, but house sales are down nearly 10% versus a year ago and, typically, house prices follow sales with a three to six month lag, the economists said.
“House price inflation is already easing and we expect it to continue to do so. Given this, investors’ house price expectations look overcooked.
“That said, previous rounds of LVR restrictions proved to have relatively short-lived impacts on the housing market, so investors may be assuming the same will occur this time.
“But a near-term decline in house price inflation is now baked in, given the recent fall in sales. And given the extreme affordability stretch, yet another surge down the track is far from a given.”
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