Where next for house prices?

The Reserve Bank of New Zealand (RBNZ) reintroduced borrowing restrictions in a bid to take some of the fizz out of our heady housing market. We round up economist views on where property prices might go next.

Since the RBNZ removed the last round of lending ‘speed bumps’ in April 2020, the housing market has accelerated rapidly, setting new records for the national median price along the way, according to RBNZ Deputy Governor and General Manager of Financial Stability Geoff Bascand.

“We are now concerned about the risk a sharp correction in the housing market poses for financial stability,” he says.

It is particularly concerned about the effect investors might be having on the market.

Up, up, up

The latest figures from Quotable Value New Zealand show the average property value increased over six percent nationally during the last three months alone, to reach $838,826. That’s an increase of over 15 percent compared to the same time last year.

“With the return of loan-to-value ratio (LVR) speed limits in March this year, we may see a gradual cooling of the market in the second half of 2021, particularly in the entry-level locations as property investors reach their credit limits and first-home buyers struggle to raise a deposit,” Quotable Value general manager David Nagel says.

“But with the long-term forecast for housing demand in New Zealand looking positive, it is difficult to see the market taking a significant turn for the worse any time soon.”

Changes ahead

The borrowing changes the RBNZ have introduced mean that from the start of this month, larger deposits will generally be required to get a mortgage - typically at least 20 percent for most borrowers, and 30 percent for most investors - rising to 40 percent from May.

The government is also set to announce in late February a rolling series of policy measures aimed at reining in property prices.

What 2021 might hold for the property market

Bagrie Economics chief economist Cameron Bagrie*, says the strong property market has been a key part of the uplift we’ve seen in the economy, as New Zealand works through the challenge of border closures.

“It is a sign that monetary policy, via lower interest rates, has been working its magic,” he says.

But the continued strength is testing the “social lens” as house prices become more unaffordable and people question the impact of surging prices on income inequality.

“The market has become too hot in the eyes of the RBNZ, as they see a speculative element. So, they’ve tightened the screws on lending by re-initiating loan-to-value restrictions.”

Bagrie says there are two big themes to watch out for going forward. Firstly, how long interest rates can remain low with inflation pressures starting to simmer in the background, and secondly, the supply/demand balance.

“We have built insufficient houses for a long time to match population growth of 90,000 per year - so we are playing catch-up. But population growth will drop from a trend of around 90,000 to 40,000 with borders closed. A critical question is at what point could we hit an inflection point where we move from playing catch-up to potentially building too many?”

Kiwibank chief economist Jarrod Kerr believes the LVR restrictions will help, but are not enough.

“More creative solutions will be required to truly tame the beast,” he says.

Meanwhile, Westpac economists describe housing construction as now “wildly” exceeding population growth. It forecasts house prices will rise 17 percent overall in 2021 but, like Nagel, think they will start cooling from later this year.

The spanner in the works, however, is the latest Covid-19 outbreak in Auckland. Just what that means for both the economy and housing market, remains to be seen.

*Cameron Bagrie is a member of the Lifetime Asset Management Asset and Liability Committee (ALCO).