House prices in New Zealand will keep rising through 2012 as interest rates stay low and supply shortages remain in areas like Auckland, Westpac chief economist Dominick Stephens says.
In its new monthly Home Truths series following the release of Real Estate Institute of New Zealand (REINZ) figures, Stephens said the latest data released this morning, showing prices hit new highs in June, was a continuation of recent themes.
"The market is quite tight by the standards of recent years, although this is nothing compared to the boom years of 2003-2007. Prices are gradually and persistently rising. And the upturn is broadening beyond just Auckland and Christchurch," Stephens said.
Earlier this year Westpac forecast nationwide house prices would rise 6% through 2012.
Prices to keep rising
In the Home Truths commentary, Stephens looked back over the 2002-2007 house price boom when prices roughly doubled.
"Strong migration and restrictions on building are sometimes cited as initial causes, but we have always found that explanation unsatisfying," Stephens said.
"Physical supply and demand factors like migration cannot explain why house prices rose so much faster than rents. Nor can they explain why all regions participated in the house price boom, when only a few regions experienced rapid population growth," he said.
"The initiator of last decade's boom must have been something that affects all regions equally, while impacting rents differently to prices. The factors we emphasise are low interest rates, ample credit, favourable tax changes, and higher inflation. "
Whatever kicked it off, by 2007 the housing boom was looking more and more like a classic bubble, in which prices rose merely because buyers expected them to keep rising.
"The Reserve Bank needed to cool the market by hiking interest rates. In 2008 floating mortgage rates reached 10.7%, and house prices went into free fall," Stephens said.
"Then the global financial crisis struck, and mortgage rates tumbled. Ironically, low interest rates in 2009 gave house prices a reprieve - prices rose 6.4% in a year of miserable economic conditions. But the market's reprieve was temporary. Over 2010 house prices drifted lower again, in part due to unfavourable changes in the tax system. By the end of that year, inflation-adjusted house prices were 14% lower than the 2007 peak," he said.
Divergence between main centres
Last year featured something New Zealand had not seen for decades - divergences in house price inflation between main centres.
"Prices rose sharply in Christchurch and Auckland, while continuing to fall almost everywhere else. This time around, we suspect that physical housing shortages did play a role. The evidence is rents, which rose in tandem with prices in both Christchurch and Auckland," Stephens said.
"The genesis of Christchurch's shortage is obvious - earthquake damage. In Auckland, ongoing population growth combined with low building activity caused the shortage. Over the three years to June 2011, for every new dwelling in Auckland the population increased by a whopping seven new residents.," he said.
"This year has delivered a more inclusive brand of house price inflation. Prices are now trending upwards from Bluff to the Cape, driven by record-low mortgage rates. Given the state of the market and the likelihood that mortgage rates will stay low for a while yet, house prices can be expected to continue rising all year. But we don't expect the current situation to last forever. When mortgage rates rise, the housing market will cool."