House prices to start falling by the end of this year

Wednesday 21st January 2004

Real estate agents and potential property buyers are in danger of overestimating the ongoing strength of New Zealand's housing market, according to Infometrics.

An increase in the average house price of around 20% over the last year is fuelling expectations of further strong capital gains over 2004. But the factors pushing up prices over 2003 will not be as potent this year.

Population growth, a fundamental driver of demand for new housing, is slowing sharply as the net inflow of migrants evaporates. Over the six months to November, the net rate of arrivals has plunged from 3,650 per month to 1,020 (seasonally adjusted). That is sufficient to reduce population growth by one-third.

Demand for housing will also be cramped this year by rising mortgage rates. Pressure on the Reserve Bank to raise interest rates has currently been alleviated by the strong New Zealand dollar. However, Infometrics predicts that the official cash rate will still rise by at least half a percentage point this year with the currency likely to peak by mid-year. Higher rates will squeeze some buyers out of the market.

Despite demand beginning to tail off, the supply of new housing remains at a historically high level. The number of new dwelling consents over the last 12 months was almost 30,000, a 26-year high. Such a rapid rate of building in the face of slowing demand is a recipe for an oversupplied housing market and, consequently, falling house prices.

House prices are likely to climb further over the next six months, but Infometrics predicts that property values will begin to fall before the end of this year. While price falls may not be significant nationwide, some areas that have experienced large price increases (such as Nelson) could undergo a nasty correction.

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