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ASB sees house prices rising 4-5% over next year as housing market comes back to life; 'Supply pressures key reason for pick-up'

Posted in Property

Housing supply pressures, low rates of return for term deposits, share market volatility, and the prospect of house price gains have contributed to the latest pick-up in the housing market, ASB economists say.

The pick-up was likely to lead to a 4-5% rise in house prices over the coming 12 months, although future gains would be constrained by the still-high starting point of prices compared to incomes and rents, they said.

Rents also had room to rise, with the fundamentals pointing to a "moderate increase" in rents.

It's alive (again)

In ASB's latest quarterly economic forecasts, chief economist Nick Tuffley said recent evidence pointed to New Zealand's housing market coming back to life.

"Sales turnover is lifting as demand starts to rise, albeit from low levels. Low interest rates continue to improve the affordability of housing and several years of falling or stagnant prices may have created significant pent‐up demand," Tuffley said.

Signs that prices were heading upwards again were also sparking the appetite of investors; housing was reported to be the most preferred investment in the recent ASB investor confidence survey, he said.

However, demand would remain constrained by still‐high levels of household indebtedness and continued net migration outflows. In addition, employment growth had recently moderated outside of Canterbury.

Supply very low

The supply of housing on the market was now at a very low level, Tuffley said.

"New listings have been low, although we are seeing tentative evidence that listings are starting to respond to rising prices. Evidence also suggests that the drop in residential construction during the GFC has only exacerbated the supply problem. The Christchurch earthquakes have also significantly reduced the stock of habitable properties in that market," he said.

The result of the recent uptick in demand and historically very low levels of supply had been an appreciation in prices.

"Unsurprisingly, price increases have been largely confined to the regions where supply is most constrained, namely Auckland and Christchurch. We have seen a slow pickup in residential building consents recently, suggesting supply pressures will start to alleviate, particularly in Christchurch," Tuffley said.

"While increased rebuilding activity in Christchurch is undoubtedly a good thing to see, it will exert pressure on construction resources elsewhere in the country. Over the next few years we will see a massive construction effort in Christchurch that will soak up much of the industry’s capacity and therefore place upward pressure on costs. That may reduce the incentive to build in other regions, keeping supply constrained," he said.

Aversion to debt may dissipate

While lower interest rates had, over the last five years, increased the affordability of housing, at the same time households had become more cautious in their approach to debt and opted to deleverage, or pay down debt.

"Becoming net savers makes sense for households in a weak and uncertain economic environment and when capital gains in the housing market are limited," Tuffley said.

"Now, though, with house prices once again starting to head upwards (and expectations of higher prices becoming embedded), some of that aversion to debt may start to weaken. Debt levels and debt servicing costs could start to climb back towards their previous peaks, particularly given current low interest rates," he said.

In saying this, the RBNZ would likely forestall such a repeat. And banks do take into account the likelihood of higher interest rates in the future when assessing affordability."

Favourable tax system

"From the early 1990s through to 2007 there was a long‐term decline in rental yields. During the 1990s the decline was most likely driven by declining inflation expectations and falling trend interest rates. During the 2000s, of course, we saw higher interest rates and higher inflation expectations, but rental yields fell further," Tuffley said.

"Both rents and house prices were rising during this period, but house prices increased by much more (hence lower yields). Fundamentally, an undersupply of housing was driving both rents and prices higher as supply struggled to keep up with strong net migration inflows. However, there was likely another factor underpinning the divergence between rent and house price increases – capital gains," he said.

"Rents are somewhat constrained by income levels, whereas house prices can be bid up by the expectation of capital gains. The expectation that they would earn capital gains also meant that property investors were willing to accept lower rental yields. The tax system also favours capital gains over other (taxable) forms of income."

Rents have some room to rise

Since 2007, rental yields had held fairly steady. Recently, undersupply had pushed rents upwards, but at a similar pace to the appreciation in house prices.

"Rents are currently about level with their long‐term average in relation to incomes, which suggests they do have some room to rise before reaching unsustainable levels. A continued undersupply of housing would produce upwards pressure," Tuffley said.

"Lower capital gains than in the past and a tax system less favourable to owners of rental property may induce investors to raise rents or seek properties with higher yields. On the other hand, the current environment is one of low interest rates and low investment returns across most asset classes. As long as that remains the case, upwards pressure on rental yields from investors may remain subdued. On balance, the fundamentals point towards moderate increases in rents," he said.

Could be faster price gains

Overall, the housing market was definitely coming back to life.

"For now, the dominant feature of the market is the low level of supply, particularly in Auckland and Christchurch. The pace of sales is picking up and a return to steady price increases may well boost demand further still," Tuffley said.

"While the economy remains soft, though, price increases will likely remain moderate, around 4‐5% over the next year. But slower than anticipated building or stronger investor appetites could easily result in faster price gains," he said.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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28 Comments

Looks like the Auckland City

Looks like the Auckland City Centre Master Plan will be out next month.  The new unitary plan will dictate housing costs in Auckland into the future so it will be very interesting to see City Centre  Plan, which should give an idea of where things will head.
 
If council have decided that they must have a say in everyones accomodation choices ("no you can't chose to live like that, you must pay 2x as much to live like this") - making housing a controlled/discretionary activity so they can get a big say in development (and big fees to get their say) then we are in for increasing housing costs (renting or owning is irrelevant).
 
If they have decided that people should be allowed to chose what/where they live and how much they are willing to pay for it, keep their input to protecting the public realm only and making housing largely a Permitted acitivity then we will have a chance of getting more affordable housing choices.
 
I bet it will be the former.

Another problem is covenants

Another problem is covenants on new subdivisions that restrict section purchasers to the MacMansion-type large/expensive builds as as a means to keep the price of the land inflated.

Confidence is back  - driving

Confidence is back  - driving the market up in a self fulfilling situation - the more confidence in price rises - the more prices rise.
A lot of momentum.
Lucky we all bought up large back in 2009/10 - now it's just a matter of sitting back and watching the headlines roll in.

An appropriate

An appropriate response:
 
http://www.youtube.com/watch?v=wtgklHQ52WE

Sk, How about the people sold

Sk, How about the people sold their house in 2008 and have not being able to buy one yet?
 

Obviously they made the wrong

Obviously they made the wrong decision.
 
 

Perhaps that should ask BH

Perhaps that should ask BH for a refund??

lol...ROFL.

lol...ROFL.

Let's put some perspective on

Let's put some perspective on these speculative self serving prognostications.
 
Telling unspun selected strata data graphs courtesy of Colin Riden.
 
The captions dignify the subdued reality experienced by the majority of property owners, selling or not since 2007. 
 
And if one were to adjust selling price data for inflation a sorry tale would be observed. Deducting ruinous maintenance/finance expenses were considered too much of a dream breaker.  

I suspect if you were

I suspect if you were speaking to an audience of property investors you would have to say that slowly.

Keep telling yourself that,

Keep telling yourself that, SH!
 
Property investors love inflation.  Mortgages aren't inflation adjusted!  So inflation doesn't make a return worse it makes it better because the rents rise!
 
Note indexes based on capital values don't account for rental income so returns aren't comparable to other indexes for fixed income, cash or gross equities.
 
It's a real stretch to pick the worst possible period in property prices and use that as an argument that property is bad.
 
Unsurprisingly on average if you had purchased at anytime in the past you would most likely be better off than having left purchasing til today.  (Note some types of properties aren't going to have been good investments in the past few years - such as apartments, leaky buildings, holiday spots, leaseholds, small towns etc, that doesn't mean property is bad just that some types of property are bad).

The Auckland Master Plan

The Auckland Master Plan needs to provide for 300m2 or 350m2 lots throughout the Res 5 and Res 6a zone. This will allow the supply of tens of thousands of sections in the central suburbs and reduce the cost of those sites.
In addition the cost of obtaining a building permit should remain as it is- ie extremely high with the exception of homes under say 120m2 where the cost of consents should be slashed to $500.
The $30,000 to $40,000 that must be paid to council in order to create a section should be cut to $5,000 max.

Absolutely not.  That will

Absolutely not.  That will turn nice suburbs into slums.
 
What Auckland needs is the slums suburbs to be turned into nice suburbs.
 
To acheive this all state houses need to go to market rents to turf out those who have no business or need to live in the vicinity of such salubrious locales and only pay $50pw for a house.
 
Then the Governement need to sell those state houses in desirable locations and build brand new replacement suburbs on the fringes of Auckland.
 
Transforming the motorway access such as providing more lanes to West Auckland so that a very fast uncongested route to the fringe can be achieved on the least developed and most affordable side of the city.

So you think increase in

So you think increase in density equals slums.  Lets apply that classic NIMBY theory to reality.  St Mary's bay is denser than Ranui therefore St Mary's bay is more slummy than Ranui.  Ponsonby is denser than Mt Roskill, therefore Mt Roskill is more desirable than Ponsonby (which explains why Mt Roskill is more expensive than Ponsonby - Not)  

bob, the problem with infill

bob, the problem with infill is that it doubles the density in general.  Lots of small homes without backyards and cramped existing homes without planting are just horrible places to live.
 
Large parts of desirable areas have been wrecked by this type of developed.  Houses that are cramped and over powered by driveways parking and turning.
 
Ponsonby and St Marys Bay etc had original sites that are in general around 350-500m2 which are invariably front sites.  That is very different to lots of back sections and drives and every site 350m2 with a mix of houses not designed for their now much smaller and narrower sites.
 
Perhaps comprehensive developments with smaller site sizes could perhaps be allowed if the project was of sufficient quality.
 
However the best way to create more sites would be the Govt clearing and splitting some of the worst state housing pockets (in central Auckland areas) into say 400m2 front sites, which would encourage the improvement of these areas further as the government moves out of those central suburbs.

That's different to

That's different to scaremongering that increasing density makes slums.  You're now talking about other issues - amount of parking required, outdoor amenity.
Just because you think somewhere is a 'horrible place to live' (and can afford to live somewhere else) doesn't mean no one else should be allowed to live with a bit less space and only 1 (or 0) carparks in order to live where they want for a price they can afford.  Your concern should be the public space and streetscapes etc - not other peoples housing choices.
There are no slums in NZ.  A slum requires no tenure security so the closest you'd get here is squatting. 
 

Once the north western

Once the north western motorway has 10 lanes in each direction there will be no more traffic congestion.  snigger.

6 lanes each way should do

6 lanes each way should do it, with dedicated lanes to each exit!

I assume your joking and know

I assume your joking and know the basics of traffic engineering - latent and induced demand etc which explains why making roads wider often makes little difference as users adjust their driving habits to suit.  

The M1 between Brisbane and

The M1 between Brisbane and Gold Cost has similar set up - not quite 6 lanes but at least 4, sometime 5.  I'd be interested to see the accident rates between that and Auckland's Southern motorway..

Every NZ Saver and Exporter

Every NZ Saver and Exporter in this country needs to do ONE THING and fast:
TAKE your money out of the Aussie banks claws right NOW! Move it anywhere but their place
DO IT!

Chris J - the reality is

Chris J - the reality is there will be nothing visionary in the Auckland Master Plan. The long term 10 year plan for the northwestern motorway is just 4 lanes in each direction only from St Luke's to Te Atatu.
The government screwed the building industry when GST hit 15% and on top of this since 1 April a builder/developer can no longer gain the useful cash flow advantage of claiming back the GST on a substantial purchase if buying off a company or even if not a company can only claim the GST back if the sale agreement and settlement date are in the same GST period.
So don't expect a building boom anytime soon in Auckland City - just rising house prices.
On the infill front take a drive out to Hobsonville Point - a great example of land use and could easily be replicated in central Auckland if someone could actually accumulate a large enough site.

I suspect that's how Plan

I suspect that's how Plan will go - geared towards allowing greater densities IF sites amalgamated to a threshold size and with a full on notified resource consent.  Similar to the current Res 8 which has never really been used because no-one can amalgamate enough land to get to 2000sqm or whatever it is and even less people can finance such a large scale high risk notified RC.
 
 

Nothing wrong with having

Nothing wrong with having land sections less than 400 sqm.  Melbourne, Sydney all have section size of less than 300sqm, some areas as small as 200 and they are hardly classified as slum areas!

Well get to it and build them

Well get to it and build them then, NZ Heads To Fin...

Agree 100%.  Interestingly in

Agree 100%. 
Interestingly in Aus, I can have a large home built in concrete blocks, 250sqm - two levels, with manufactured stone kitchen, LED lights, Bosch or Miele appliances, 5 heat pumps, 3KW solar panels, all solid doors, fully landscape and small swimming pool for just under $435K (excl land of course).  Try that in Auckland...