ASB sees 3-4% fall in house prices in 2010 as budget fear and higher rates drag on confidence

Housing confidence softened in the three months to April as concerns about rising interest rates and budget tax changes hit demand from buyers, an ASB survey of confidence has found. 

ASB said it now expected house prices to fall 3-4% in 2010 as a result of this waning of buyer appetites. The net percentage of respondents expecting prices to rise slumped to 35% from 51% in the previous survey three months earlier.

"It appears growing awareness that interest rates will increase over the coming year, combined with uncertainty over potential tax changes to investment property to be announced in the Budget in May, has made housing a less attractive investment option.  As such, the balance is now tipped slightly in favour of buyers, given the supply of inventory is ample relative to the modest turnover over 2010," ASB said.

"We expect house prices will fall 3-4% in 2010, reflecting the evident slowing of buyer appetite. Beyond the ups and downs of 2010, we expect weak house price growth. A positive for house prices is continued population growth at a time when new construction has not kept pace. However, prices do remain quite high compared to incomes and rents – with the tax changes likely to require even higher gross rental yields in the future to make the sums add up."

See the full results below:

Housing confidence has continued to soften in the three months to April 2010. In particular, there has been a decline in the proportion of respondents expecting house prices to increase in the future. These survey results are in line with recent data showing a slowing in housing market activity.

It appears growing awareness that interest rates will increase over the coming year, combined with uncertainty over potential tax changes to investment property to be announced in the Budget in May, has made housing a less attractive investment option. As such, the balance is now tipped slightly in favour of buyers, given the supply of inventory is ample relative to the modest turnover over 2010.

This is reflected in the median days to sell, which has begun to edge back up since spring and is now at the long-term average. We expect house prices will fall 3-4% in 2010 as a result of this evident slowing of buyer appetite. Price expectations declined over the quarter. This decline was broad-based across the regions, with the decline particularly evident in the rest of the North Island (North Island region excluding Auckland).

The South Island now have the highest price expectations of the three regions. A breakdown of the net quarterly figure is: • 51% expect higher prices (61% last quarter), with 16% expecting lower prices (10%); • the difference being the net 35% (51% previously); • 30% expect the same (24%); • 4% don’t know (4%).

On balance respondents are less optimistic on now being a good time to buy. As with price expectations, the decline is more evident in the rest of the North Island. The breakdown is: • 40% say it is a good time to buy (43% previously), while 10% say it is a bad time (10%); • the difference is the net 29% (33%); • 46% say it is neither good nor bad (42%); • 4% don’t know (5%).

Expectations of higher interest rates continue as RBNZ prepares to lift the OCR.

It appears higher interest rates are playing a part in the waning optimism towards housing. The RBNZ expects to lift the Official Cash Rate in the coming months, and the majority of respondents continue to expect higher interest rates

The quarterly breakdown of response is: • 64% expect higher interest rates (65% in the previous quarter), while 5% expect lower interest rates (5%); • The difference is the net 59% expecting higher rates (60% previously); • 21% believe interest rates will stay the same (21%); • 11% don’t know (9%).

Further signs of slowing momentum in housing market. Budget uncertainty driving slowing in housing market activity.

There has been a sharp fall in housing market activity over the past few months. This slowing in activity has been largely driven by continued uncertainty over the potential for tax advantages for property investment to be removed at the upcoming Budget. The two main ‘live’ options are removing the ability to claim depreciation on investment property, and ring-fencing tax losses from property so that they cannot be used to offset other sources of income.

This uncertainty has seen many potential buyers choosing to wait on the sidelines until the Budget announcement on May 20. Any tax changes are likely to continue to influence the housing market for some time. This slowing in housing market activity is particularly evident in the decline in house sales, with sales now well down on year-ago levels when super-low interest rates were providing a boost to the housing market.

This lower level of activity is also reflected in subdued mortgage approvals, are now around 15% lower relative to the December quarter last year. Reflecting this easing in housing demand, median days to sell has started edging up since spring, such that it is now around the long-term average. The possibility that the tax advantages for property investment will be reduced may have prompted some sellers, but overall there is little sign at this stage of a rush to sell off investment properties. As a result, the number of fresh house listings remains at a relatively low level. Even so, the reduced sales activity has lifted the total number of houses listed for sale.

Overall, it looks as though the supply of inventory is ample relative to the modest turnover over 2010. Taking these demand and supply dynamics into account, it appears the balance is now tipped slightly in favour of buyers. Despite these recent developments, house prices remain resilient for now. The REINZ stratified measure of house prices – which takes into account the composition of houses sold – shows a 6.8% price increase relative to a year ago. Shorter-term fixed mortgage rates have been rising off their 2009 lows as markets prepare for an OCR increase from the RBNZ in the coming months. Meanwhile, the increase in longer-term fixed mortgage rates over the past year reflects both a return to a more normal OCR level and the higher cost of long-term funding banks have been paying following the financial crisis.

These increases in mortgage rates have also contributed to slower housing market activity. Potential changes to tax policy will continue to weigh on housing market in the near term. We expect uncertainty surrounding the potential removal of tax advantages for property investment will continue to weigh on housing market activity until details are announced in the Budget on May 20. Even then, any changes will likely mean reduced demand for investment property and thus lower housing market activity.

We expect house prices will fall 3-4% in 2010, reflecting the evident slowing of buyer appetite. Beyond the ups and downs of 2010, we expect weak house price growth. A positive for house prices is continued population growth at a time when new construction has not kept pace. However, prices do remain quite high compared to incomes and rents – with the tax changes likely to require even higher gross rental yields in the future to make the sums add up.