Bayleys Real Estate managing director Mike Bayley said he expects the residential property market will undergo a small "if somewhat unspectacular" recovery over 2010.

(W)hile the New Zealand economy would continue to return to health throughout 2010, house price value increases would be small, Bayley said. "And that would be good for the whole economy "“ by avoiding a "˜boom/bust' cycle."

Here is the full release from Bayleys:

New Zealand's residential property market is in for a steady "“ if somewhat unspectacular - year of recovery in both prices and sales volumes, according to the head of one of the country's largest real estate agencies.

Bayleys Real Estate managing director Mike Bayley predicted that while the New Zealand economy would continue to return to health throughout 2010, house price value increases would be small. And that would be good for the whole economy "“ by avoiding a "˜boom/bust' cycle, he said.

Mike Bayley said the supply and demand for residential property is dictated by three primary drivers:

"¢ Immigration
"¢ Employment "“ and by association, unemployment
"¢ Interest rates

Each of these specifically impacts on the residential property market, he added.

"Firstly, immigration. Net immigration levels remained well above forecasts in 2009, and there is little to suggest this influx will abate in 2010, although forecasts will obviously be revised upward to more accurately reflect the trend which emerged last year," Mike Bayley said.

"Greater Auckland is the primary location in which the majority of new immigrants settle "“ due to employment opportunities and existing ethnic-based social networks. This will ensure that Auckland's residential property market "“ both from an owner/occupier perspective and for investors - will continue to have a steady supply of new buyers/tenants coming on stream, in addition to existing New Zealanders entering the market for the first time, or looking to trade up.

"Secondly, employment. Being so intricately linked to a general economic recovery, I foresee that employment, also known as unemployment levels, will bottom out at around 93 "“ 94 percent - equating to an unemployment rate of six "“ seven per cent. What is more likely to happen for the first half of the year at least is that production capacity within existing employment will rise "“ that is upping the hours of part-timers or casual staff before taking on any additional new staff in any great numbers."

Mike Bayley said that for those in employment, this would deliver higher net incomes than perhaps seen in 2009 when businesses contracted excess employment capacity. Higher incomes = greater consumer spending capability, of which home-purchasing is an element for some.

"A more solid employment future will provide a level of psychological comfort for those who held off buying a new home or trading up in 2008/2009 because of nervousness about their employment prospects," Mike Bayley said.

"They will be in the market to buy, and will have built up sound deposits through their propensity for saving "˜for a rainy day'."

Thirdly, interest rates. The cheap medium-term cash which underpinned the stabilisation of the property market in the early to middle parts of 2009 and indeed provided a much-needed stimulus to a flagging sector at that time, is now long gone, said Mike Bayley.

"Virtually every bank economist and fiscal commentator is predicting the Reserve Bank will begin hiking up the official cash rate (OCR) some time in the second or third quarter of 2010. And, they are predicting substantial step increases of between 25 "“ 50 base points (a quarter to a half a percent) across a number of months. This could see the base rate move markedly up from its current level of 2.5 percent to somewhere around five percent," he said.

"For mortgages, that could see a floating rate somewhere around seven to eight percent "“ which in the lower and middle price brackets of the residential property market, will cap the limits some home buyers will now have available to them to purchase a home, effectively taking them out of the market for certain properties at the top of their price range.

"While higher mortgage rates do not necessarily stop people buying homes, it limits their choice - based on their ability to service loan repayments."