House price inflation in Auckland, which has recently been running at close to 20%, is set to continue in double digits until into 2015, according to ASB chief economist Nick Tuffley.
Tuffley also expects that national house prices are likely to rise to 5.3-times income by the end of 2015.
In the latest ASB quarterly economic forecasts, Tuffley said while house sales in the Auckland region had remained steady in recent months, the continued decline in the number of days taken to sell a house suggested sales may be constrained by supply.
"Housing inventory in the region continues to fall to very low levels, and this is putting upward pressure on house prices.
"We expect annual house prices in Auckland will continue to record double-digit growth until early 2015," Tuffley said.
"Meanwhile, we expect annual house price inflation will peak at an annual rate of around 9% on a nationwide basis in early 2014."
The most recent REINZ monthly figures showed national house price inflation running at 8.4%.
"In Auckland and Canterbury, house prices are now growing at double-digit rates. Outside of these areas, prices are growing at 4-5% per annum," Tuffley said.
"From a monetary policy perspective the [Reserve Bank] will be mindful of the wealth impacts of stronger house prices, and the spillover to stronger consumer demand.
"From a financial stability perspective, the RBNZ is concerned house prices (and debt levels) have increased from already-elevated levels relative to fundamentals such as household income. Nationwide house prices are currently 5x household disposable incomes. The IMF sees the ideal level as being below 4x.
"Based off our house price inflation forecasts, house prices are likely to rise to 5.3x income by the end of 2015."
The overheating state of the Auckland market in particular is becoming a significant economic and political issue. The Government and the Auckland Council have agreed in principle to an Auckland Housing Accord that would aim to fast-track new developments, with an additional 39,000 houses targeted over a three-year period.
The RBNZ has indicated it is looking at placing "speed limits" on high loan-to-value (LVR) lending, a power that is one of the new "macro-prudential tools" the central bank has been developing. See here for our articles on LVRs.
The Government, however, has made clear that it would like to see first home buyers exempt from lending limits, But the RBNZ has made equally clear it does not see scope for exemptions. The Prime Minister was striking a more conciliatory tone on this issue in a speech yesterday.
But over the weekend, Housing Minister Nick Smith revealed that the Government was considering making it easier for first-time house buyers to access their KiwiSaver funds in order to find enough money for a deposit.
Tuffley said there was a "strong likelihood" the RBNZ would imposes restrictions on new mortgage lending at high (80+%) loan-to-value ratios.
Higher rates needed
"We still expect higher interest rates will be needed to rein in the housing market, even if LVR limits are put in place," he said.
"But such limits risk placing the burden of dealing with overheating house prices on first-home buyers, arguably the most deserving of prospective home buyers."
The RBNZ is universally expected to leave official interest rates unchanged at the 2.5% they have been since March 2011 when reviewing them again tomorrow, but will be expected to voice concerns again about the housing market. Economists are expecting the first interest rate rises to come early next year.
Tuffley said building activity in Auckland and Canterbury had responded to supply shortages and increased over the past year. However, the supply response had been slow and it would be a number of years before the supply/demand imbalance was fully restored.
Concerning development
"A concerning development on the supply response is the strong growth in land prices over 2012 which has muted the price signal to build more houses rather than buy an existing one," Tuffley said.
Low interest rates, a recovering labour market and increased consumer confidence had contributed to increased housing demand.
"The turnaround in net migration to positive inflows over 2013 will also add further to demand for housing. Meanwhile, investors have noticed the housing shortfall and potential for capital gains. Investor confidence in housing returns has steadily lifted over the past year."
Tuffley said higher house prices had supported an improvement in consumer confidence over the past year, which in turn had flowed through to retail spending growth.
"In particular, there has been a recovery in spending on durables, reflecting the improvement in household optimism about big-ticket purchases. We expect consumer spending will continue to recover over the coming years, as households feel more confident in light of higher house prices and improving labour market prospects."
Business confidence surveys pointed to an improvement in hiring and investment intentions in recent months, as businesses felt more confident about expanding their operations, Tuffley said.
Employment pick-up
"Consequently, employment growth should pick up over the coming year, gradually pushing the unemployment rate down over the coming years to reach 5% by the end of 2015."
Tuffley expected that, overall, stronger construction activity and recovery in business investment would drive gross domestic product growth over the coming years.
"We expect annual average growth to reach around 3.5% in early 2015 before settling to just under 3%."
Tuffley expected that the value of the New Zealand dollar would start to ease slightly over the next few years.
"If this occurs, then tradable inflation will likely pick up at a time when non-tradable inflation will be elevated. This will push inflation pressures back into the upper half of the RBNZ’s 1-3% target band."
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