Lower prices mean budget squeeze
Thursday 13 April 2017
Flatter house prices are on the cards this year, but any decline in prices will have broader economic consequences, Infometrics is predicting.
By Miriam Bell
The economic consultancy has just released its latest forecasts and they show house prices falling in the second half this year to sit 2.7% below their December 2016 level.
This decline will be due to the dampening effect of tighter mortgage lending conditions and higher interest rates.
Infometrics chief forecaster Gareth Kiernan said the emergence of flat or falling house prices within the next few years will undermine consumers’ willingness to spend.
At the same time, the discretionary portion of households’ budgets will be squeezed as interest rates gradually rise from their historic lows.
These effects will be particularly acute in Auckland, where house prices are highest, he said.
“An increase in mortgage rates from 5% to 6% adds almost $200 to fortnightly repayments on a 25-year mortgage for someone who has bought the average Auckland house with a 20% deposit.
“The result of this squeeze is persistently weak growth in household spending from 2018 through to early 2021, with per-capita growth nationwide holding below 1.0%pa throughout this period.”
People that have heavily leveraged themselves to purchase property are likely to find that increasing debt-servicing costs cause a significant degree of financial stress, Kiernan warned.
“Re-entering the workforce or taking on additional hours to boost their income shape is one way that people can adapt as mortgage rates track upwards.”
Meanwhile, Infometrics sees headwinds building for the residential construction sector.
The sector is considered one of the current drivers of economic growth but it is already struggling with capacity pressures.
Kieran said the safety net of rising house prices have acted as a safety net for the sector.
“They encourage developers to push ahead with new projects as they expect any building cost overruns to be covered by higher sale prices at the end of construction.
“But, with the wind having been taken out of the housing market’s sails, that financial buffer looks to be less assured.”
Further, Infometrics believes the annual new dwelling consent total slipping back from its current level of 30,162 in the year to February 2017 to below 29,000pa in the March 2018 year.
This is a worrying prediction, given New Zealand, and particularly Auckland’s, ongoing housing supply shortage.
In a broader economic sense, Infometrics expects greater price pressures both domestically and internationally and have revised their inflation forecast for 2017 up by 0.2% to 1.7% per annum.
Kiernan said that, against this backdrop, the Reserve Bank is likely to begin raising the OCR by the middle of next year.
“But these OCR increases will only be gradual, as ongoing elevated levels of net migration and high labour force participation will prevent capacity pressures getting as out of hand as they did in previous business cycles.”
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