Wednesday 22nd May 2019
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Westpac is expecting house price inflation to take off again thanks to the government’s decision to scrap plans for a capital gains tax and falling mortgage rates.
That puts paid to another cut in the official cash rate.
Chief economist Dominick Stephens says he’s expecting house price inflation nationally will jump from 1.3 percent to more than 7 percent during the next year or so.
“That should spur consumer spending and remove the need for a further OCR reduction from the Reserve Bank,” Stephens says in his bank’s latest set of economic forecasts.
Westpac’s advertised “special” two-year fixed rate is currently 3.95 percent, down from about 4.5 percent a year ago.
Stephens says two-year mortgages have dropped 40 points since March while five-year rates have dropped by double that to a record low at 4.6 percent.
Two years is the most popular period to fix mortgages, with loans due to come off their fixed terms within two years accounting for 32.4 percent of all fixed mortgages and 19 percent of all mortgages in March.
That reflected the Reserve Bank firstly foreshadowing an OCR cut in late March and then delivering that cut earlier this month.
“History shows that interest rates have a powerful impact on the housing market and the fall in mortgage rates over the last few months is the most substantial move that we’ve seen in some time,” Westpac’s economists say.
But a 7 percent increase in house prices should be kept in perspective because that’s modest compared to previous upswings, they say.
“There are still policy-related headwinds for the housing market, such as the foreign buyer ban and the ringfencing of losses on rental properties,” they say.
“And we expect that the differences in regional housing markets will persist for a while longer. Auckland prices could go from falling to slightly rising while prices elsewhere may accelerate slightly.”
The latest Real Estate Institute house price index for Auckland was down 4.4 percent in April from a year earlier while the index - excluding Auckland - eased to a 6.7 percent annual increase from 7.2 percent in March.
Westpac is assuming that there has been an upswing in net migration, boosting population growth, but acknowledges the new methodology for collating migration changes is subject to large revisions.
The new methodology also suggests net migration was lower in the past than previously believed, meaning that there’s less of a gap between demand for housing and the building of new dwellings.
“The upgraded outlook for net migration gives more support to our view that housing construction is set to take another leg higher this year,” Westpac says.
“Growth has been harder to achieve in recent times, now that building activity has reached a relatively high share of GDP and capacity constraints are an issue,” it says.
“Nevertheless, there has been fresh momentum in building consents in recent months, particularly in Auckland, which has reached new multi-decade highs. That points to a significant amount of work in the pipeline for the next year or so.
“We think that this year will prove to be something of a last hurrah for growth in homebuilding as activity is now reaching the levels needed to meet population growth and address the shortage of housing that had accumulated in past years.”
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