ANZ's latest report on the residential property market suggests the housing shortage is starting to decline, but whether that continues depends on immigration settings once the border is reopened.
"The closed border means the New Zealand housing market is in the rare position of being able to build enough houses to keep up with new demand," ANZ's economists say in their latest Property Focus report. ANZ is the country's biggest home loan lender with over $100 billion of residential mortgage exposure at March 31.
The ANZ economists also warn that disruption to international supply chains is aggravating capacity pressures and pushing up costs in the construction sector, which could put a handbrake on the supply of new homes.
"On net, it looks like New Zealand will be able to chip away at the housing shortage pretty quickly over 2021," the report says.
"But it's important to note that this is largely due to the border closure, as the the largest source of demand for new housing has been completely cut off.
"This brief respite will not last unless serious changes to immigration policy are made."
The report also says that the recent strong demand for homes, which has dramatically increased prices, appears close to peaking.
"Credit and affordability constraints are biting, mortgage rates appear to have bottomed out, loan-to-valuation restrictions are back and bigger than before, building consents are at historical highs and population growth is being severely curtailed by the border closure," it says.
"In other words, the demand pulse is probably close to peaking and supply is catching up, although there's still a long way to go."
The report is picking "a significant moderation in house price inflation" over 2021, and that the Reserve Bank will start raising interest rates from August next year, with the Official Cash Rate (OCR) rising from the current 0.25% to 1.25% by the end of 2023.
"The higher OCR is expected to be fully passed through to mortgage rates," the report says.
"We think interest rates have bottomed out for now and with OCR hikes pencilled in for August 2022, we're expecting mortgage rates to start lifting in the not too distant future.
"This should see demand for houses fall significantly.
"With prices so high, even a small rise in mortgage rates will significantly increase the debt servicing cost of buying a house, as well as making repayments much harder to afford."
That is expected to have a cooling effect on the market.
"With mortgage rates being such an important driver of house prices, (especially when prices are so high relative to incomes), we expect this to result in a decent headwind for house prices." the report said.
The full Property Focus report is available here.
The comment stream on this story is now closed.
- You can have articles like this delivered directly to your inbox via our free Property Newsletter. We send it out 3-5 times a week with all of our property-related news, including auction results, interest rate movements and market commentary and analysis. To start receiving them, go to our email sign up page, scroll down to option 6 to select the Property Newsletter, enter your email address and hit the Sign Me Up button.