Nationwide house prices are overvalued by up to 10%, according to ANZ economists, but rather than prices falling, they suggest this overvaluation will slowly but surely be gobbled up by inflation.
ANZ economists make these comments in their September Property Focus report, which features the bank's annual survey of property investors.
"Based on some crude metrics, we’ve calculated that New Zealand house prices remain overvalued by up to 10% at the nationwide level," ANZ says.
"Rather than house prices falling from their current levels, we expect that the overvaluation will gradually be eroded by inflation."
"Further down the track demand for housing will eventually rise. This will be in conjunction with improving employment prospects and an improvement in the New Zealand’s economic growth story. The property market will continue to be an avenue for investors, but landlords will have to make the rental income sums work, rather then rely on capital appreciation as the foundation of their investment portfolios," the economists add.
Asked what the "crude metrics" used to determine the 10% overvaluation were, ANZ chief economist Cameron Bagrie said: "A combination of Tobin's Q, a composite model that uses income and borrowing costs and the implied rate of return."
The last Real Estate Institute of New Zealand (REINZ) figures show sales volumes rose 21.1% to 5,192 in August from the same month a year earlier, while the median price was NZ$355,00 up NZ$5,000 or 1.4%. Meanwhile, the latest realestate.co.nz property report shows asking prices for new listings jumping NZ$10,000, more than the usual winter/spring jump, in September from August.
For the year to June the Consumer Price Index was 5.3%, including a 2.3% rise in the December quarter when GST was hiked to 15% from 12.5%. The Reserve Bank's latest inflation expectations survey has respondents expecting inflation to be below 3% in both one and two years' time. The central bank has a 1% to 3% - on average over the medium term - target range for inflation.
'Most property investors expecting or hoping for a return to the heady, pre-crisis days'
Meanwhile, ANZ says its survey of property investors shows investors expect more short-term growth in their property value than they did last year.
"The largest proportion of respondents (36%) thought house prices would rise between 0- 2.4% over the next year," ANZ says. "To put this in context, back in 2007, the largest proportion expected 5%."
"Looking out over the next five years, most respondents (32%) thought house prices would increase between 6 and 10%. Back in 2007 this figure was 7½ %. This isn’t too dissimilar and suggests that most investors are expecting (or hoping for) a return to the heady, pre-Global Financial Crisis days. Almost nine out of ten investors intend to hold onto their properties for the longer term. There was also an increase in the number of long-term investors planning to renovate or develop their property. On the flip-side, fewer investors are intending to purchase another property."
As for rents, ANZ says an increasing proportion of property investors expect rents to rise faster next year. It says 80% expect growth in rents over the current year, up from 75% last year.
"Increasing rental growth is expected for the survey horizon of five years. The average rate investors expect rents to increase by in the next five years is 6-10%."
The annual ANZ survey of property investors is done in conjunction with the NZ Property Investors’ Federation. It involved an online survey of 1,806 interviews with New Zealand property investors during three weeks in July.
'Floating mortgages better than fixed'
As for home loan borrowers, the ANZ economists suggest floating remains a better option than fixing. See all the banks' advertised home loan rates here.
"Mortgage rates have held stable for almost six months. With global uncertainty likely to delay the timing of Reserve Bank Official Cash Rate increases until well into 2012, it is difficult to argue that there is a strong case for fixing, at least from a cost perspective. Floating remains the cheapest rate. As such, we favour remaining on floating. Although the OCR is set to rise in time, this depends crucially on global financial markets stabilising, and on the fallout here in New Zealand being limited. This is a high hurdle. Meanwhile, time is on the borrower’s side."
The OCR is currently 2.5%.