In last week’s Budget Treasury predicted that after rising by 17% in the year to June, average house prices around the country would essentially sit still for the following years after 2022, rising 2.1% then 2.1% then 2.5%.
Alexander says while Treasury’s forecasts cannot be outright dismissed, they appear to be driven by a high level of confidence in the effectiveness of the Government’s changes to the bright-line test and tax deductibility, alongside the 40% minimum deposit now required from investors.
Treasury’s claims he debunks
1. All forecasts of flat to falling house prices since the late-1980s have been wrong. “In that light, Treasury’s predictions fall into the category called ‘extraordinary’ but for which it offers no extraordinary proof/reasoning.”
2. House prices in New Zealand tend to rise when the pace of growth in the economy is picking up, which is what Treasury is predicting, along with good jobs growth and a falling unemployment rate.
3. Treasury predicts no increase in either mortgage interest rates or bank term deposit rates until 2025. In other words, it sees the biggest factor causing the 29% surge in house prices since May last year remaining in place.
Alexander says the chances are high that Treasury’s interest rate forecasts are too optimistic given the lack of any obvious need for the economy to continue to receive a boost from record low interest rates. So, at its heart there is an inconsistency in Treasury’s forecasting, he says.
4. “Even though all my surveys show investors pulling back, history tells us this throwing the toys out of the cot phase does not tend to produce a wave of selling or a buying strike.
5. “While the Government hopes average Kiwis will seek to grow their wealth by not buying property and instead investing in productive assets, no bank is going to accelerate that wealth growth through debt as happens with housing.”
Alexander says there certainly are many viable, safe, alternative investments for people to place their long-term savings into which will deliver good wealth growth over time.
But the debt (and risk attached) able to be used for residential property investment delivers a growth curve not available for anything else – and that has not changed apart from the introduction of the 40% minimum deposit.
“Now, if the Reserve Bank were to put an 80% deposit requirement in place, that would change things.”
He says no-one has anything to be proud of when it comes to a track record of predicting average price movements for house prices.
Alexander is assuming 4% a year long-term, but for the coming year something at the low end of a range from 5% to 10%. But with additional slowing down after that depending on the pace with which interest rates rise and how people react this cycle.
“The worst scenario for investors will be if house prices rise 10-15% in the coming year, it can be reasonably expected additional moves will be made by the Government to reduce their demand.”