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Westpac economists say house price growth definitely easing, but LVR limits will have only 'modest' impact

Property
Westpac economists say house price growth definitely easing, but LVR limits will have only 'modest' impact
<a href="http://www.shutterstock.com/">Image sourced from Shutterstock.com</a>

There is "no doubt now" that the housing market is past its peak, Westpac economists say.

In their first "Economic Overview" for the year - the text for which was actually finalised before QV figures out this week showing an easing of house price growth in January - the economists said that sales have fallen, the average time to sell is lengthening and "there are early signs that house prices are rising at a slower pace.

Westpac is sticking with its forecast that house price growth will ease to 6.5% this year. Last year Westpac economists produced detailed forecasts for the next 10 years, including a prediction that house prices would actually decline for a period starting in 2016.

In their latest economic overview the economists said they expected that higher interest rates would be the main restraint on house price growth this year.

"Our 'investment value' approach shows that the valuation gap has already closed as term mortgage rates have risen over the last six months. Rising incomes and stronger net immigration make it difficult to argue for a downward correction in prices in the near future, but we expect prices to start flattening out by next year," they said.

But the economists still thought the impact on house price inflation of the Reserve Bank's 'speed limits' on high loan-to-value lending would be "modest".

Low-end effect

"The drop in sales has been concentrated in the lower-priced end of the market, which is consistent with first-time buyers being hit hardest by the regulations.

"Meanwhile, two-tier mortgage pricing and lenders’ efforts to grow the low-LVR portion of their loan books (if anything, they seem to have been surprised by the potential for growth in this area) have created some very favourable conditions for buyers with large enough deposits," they said.

Just under a year ago the Westpac economists put out a paper, which said that Auckland needed to build 9500 more houses a year to make up its shortfall.

In the latest overview the economists have revisited their projections in the light of 2013 census figures showing the Auckland population not growing by as much as expected.

"Auckland’s shortage of housing is not as severe as we thought last year," the economists said.

"We now estimate that over the past five years Auckland has built 13,640 too few dwellings. A year ago the comparable figure was 21,840.

Faster than estimated

"...Our calculations also reveal that the rate of increase in Auckland’s housing stock has been faster than previously estimated. (Our estimate of new dwelling construction relies on a ‘conversion rate’ from dwelling consents to actual increases in the housing stock. The 2013 Census revealed a higher conversion rate than the 2006 Census.)"

The economists are now saying that Auckland needs 9169 new houses a year, which would be a 53% increase on the 5986 consented in 2013, but is annually about 330, or 3.5%, fewer than they were calling for a year ago.

In terms of the general economy, the Westpac economists are now picking GDP growth to accelerate to 4.2%, which is an increase in forecast from 3.8% as of their last economic overview in November.

"Over the last two years, we have highlighted a lift in construction activity and a resurgent housing market as key catalysts for the economy’s upturn. These two factors will continue to play a major role in the level of economic activity this year, but they have probably passed their peaks in terms of the rate of growth," they said.

"Instead, we expect them to share the spotlight this year with a third factor, namely, a sharp and sustained lift in national income as a result of New Zealand’s record-high terms of trade."

Upgraded assessment

Since their November overview, the Westpac economists have upgraded their assessment of the sustainable long-run level of the terms of trade.

"We recognise that there are substantial risks to this view – particularly in light of the recent wobbles in some global markets – and it’s not a judgement that we came to lightly. Indeed, we’ve been only gradually persuaded by two factors: the sheer level of New Zealand’s export commodity prices, at a time when the global economy is fairly lacklustre, and the massive shift in New Zealand’s level of engagement with the Chinese market in recent years."

The economists said it was difficult to find precedent for "such a significant step-change in New Zealand’s trade performance".

While the terms of trade had been higher in the past, such as in the 1973 boom, that period of prosperity (and eventual overheating) was much shorter-lived than the economists are proposing now (within two years the OPEC oil shock had sent our terms of trade down to record lows).

'Substantial benefits'

"The benefits to the New Zealand economy over the next year alone will be substantial," they said.

"The combination of higher world prices and higher export volumes (which were depressed last year by a severe drought) translates to an income boost of nearly $5bn this year. If high export incomes are to become a regular feature rather than a one-off, the impact on the wider economy will be greater still."

The boost to nominal incomes would flow through to real activity in "myriad ways, which are not easy to pin down".  The economists are forecasting that around half of the income boost will be saved or used to pay down debt; the other half will translate into higher household spending, construction activity and business investment in plant and equipment.

"Business investment in particular tends to be strongly procyclical, and with a large imported component; there is already tentative evidence for a sizeable upswing, based on surveys of business intentions and a strong lift in imports of capital equipment in recent months.

Dollar higher for longer

"However, the effect on balance will still be higher savings and a smaller current account deficit. Another significant transmission channel is the exchange rate; in keeping with our higher terms of trade projections, we now expect the New Zealand dollar to remain elevated for a longer period."

A higher exchange rate also implied that tradables inflation would remain subdued for longer, providing a substantial offset to the build-up of domestic inflation pressures as the economy uses up its spare capacity.

"For this reason, our forecast of the OCR [Official Cash Rate] in coming years is little changed despite an upgrade to our economic growth forecasts.

"We expect the OCR hiking cycle will proceed in increments of 25 basis points (bps) – OCR hikes of 50bps or more are highly unlikely. The hikes will be well signalled in advance, as will any decision to pause. The RBNZ will eschew on-the-day surprises, such as lifting the OCR without having given prior warning."

The economists said there were a number of reasons the RBNZ would want to keep the OCR hiking cycle well-signalled, smooth and unsurprising. Credible signals could push longer-term interest rates up in advance of actual OCR hikes, doing much of the RBNZ’s work for it.

'Clear and credible signals'

At the same time, clear and credible signals helped to minimise financial market volatility by reducing the scope for markets to "go on wild-goose chases".

"Another of the RBNZ’s motivations is more subtle and political in nature. In New Zealand there is a strong body of opposition to inflation targeting, stemming from a mistaken belief that the RBNZ is responsible for the high exchange rate.

"The RBNZ won’t want to antagonise the general public any more than it has to, for fear of gifting its perennial critics political ammunition – especially after the public-relations challenges of the high-LVR mortgage restrictions.

"A good way to avoid antagonising people is to make sure that they are well warned in advance. Another is to ensure that, on the day of OCR hikes, any increase in market interest rates and the exchange rate is kept to a minimum."

'Slow and steady'

The economists said the inflation outlook was such that the RBNZ could afford a slow and steady approach. The economist's inflation forecast (showing inflation slowly rising to 2.4% by June 2016) now featured "fairly benign inflation" in the near term due to the likelihood of a sustained high exchange rate and a few expected one-offs such as falling ACC levies.

"True, we are still forecasting an extended period of inflation above the RBNZ’s 2% target, but this outlook is more uncomfortable than panic-inducing for the RBNZ. We are forecasting OCR hikes of 25bps in March, April, June, July and December this year.

"But in keeping with the theme of this section, we may adapt our near-term OCR forecast in light of RBNZ communications. Regarding the eventual extent of the OCR hiking cycle, we have not changed our view. We forecast the OCR to peak at 5.5% in 2016, and to subsequently fall as the Canterbury rebuild winds down."

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34 Comments

House prices past their peak !  I feel sorry for the mugs on those 100% mortgages.  Imagine stuff in a house, paying a huge mortgage, and if you sell you get an enormous bill which you can pay.  So you stay.

Maybe we should thank the Reserve Bank for limiting that particular dumbness.  At least the 80% mortgaged people have some narrow ledge of safety.

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I wouldnt call them "mugs" myself. Ppl who really just wanted their own home and got it on a 95% 30 year mortgage, they are buggered, yes these I will feel hugely sorry for.  Foolish, yes, fooled over frankly by marketing, pollies etc for years "it will be alright" "growth, growth, growth".....   

regards

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Prices aren't falling yet, so those mugs are still doing ok. If sentiment changes and the Kiwi/Asian investor herd charges out of property things could get interesting.

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Yep.  If they go up then some will be happy and some will be sad.  Yes up is possible.

And if they go down some will be happy and some will be sad.  Including suicide by some with a 100% mortgage that takes every last cent they have each week - for the next 30 years - and a property value sinking.

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"house price growth will ease to 6.5% this year"

 

Westpac are predicting house price rises KH, just to a lesser degree than the past few years. Don't feel too sorry for "the mugs".

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Dont feel sorry for them at all as 6.5% after tax beats having money in the bank.

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I would like to know exactly what the expression "past its peak ' means?

Does that mean its going down the other side ?

or

Fall off the cliff

or

 

That it will taper off?

or

That the growth will simply slow down

or

They actually dont really know , but that interest rate increases will dampen things and  may justify their prediction?

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Ostrich, time for a cartoon

http://www.youtube.com/watch?v=93B072j-E3I

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Yeah, the prices are not peaked or peaking.  Rather it's a first derivative peak. 

 

The rate of growth in house prices have peaked.  House prices themselves are still going up, it's just that rate at which they are going up is now coming down.

 

As they say 6% year on year increase, not the 30% we have been seeing in some auckland suburbs.

 

To say 'the market' is past it's peak is clearly misleading.  The market to me means market price, not rate of growth in the market prices.  Market prices are going up.

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"or

They actually dont really know , but that interest rate increases will dampen things and  may justify their prediction?"

 

 

Or it just sounds good. Lol!

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Front page of the Herald, blaring headline today:

City housing boom spreads

Auckland property price rise
19.2% Waitakere (year on year)
16.1% Manukau City

 

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The Westies will be happy , Outrageous Fortune indeed!

SK

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They said that "there are early signs that house prices are rising at a slower pace". In other words, it is the rate at which the prices are going up that has peaked and may be decreasing. The prices will still go up for a while. When the decreasing rate reaches the value of 0% per month, this will mean that the prices stabilised. The rate may become negative, meaning that the prices will start going down. All of this is not unusual at all: property prices are "cyclical", rising strongly for some time, then levelling off and even going a bit down before the next rising cycle starts... Of course, "special causes" would have a superimposed influence on the shape of any given cycle, but they are highly unpredictable.

All the smarty pants claims about "there will be no growth any more", predictions of 30% (90% as claimed by some) "crashes", etc. are not worth paying much attention to. As stated, cycle distortions can and do happen, but they are caused by factors that are difficult to predict.

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  • Look at past cycle price graphs (rbnz), very similar so far, just scaled down a bit.  Strong gains over 10%, then slowing down as interest rates move up, but still positive, i.e 5%, over next 3-4 years. (/n)

  • We might be around the 2004 point of last cycle (peak yoy gains of last cycle).  Interest rates increased from 2004 until 2008, and prices kept edging up (even at 10% floating).  The early part of the cycle see's auckland price gains, before settling down. The later part of the cycle sees the provinces play catch up as property with higher yields become required by banks to compensate higher interest rates.

  • Provinces like palmerston north, where the median house price is below the first home buyer price cap of 300k, and where yields and low prices make buying low risk,  are due for a re-rating as PI's seek safer and better yielding property to buy with their significant equity gained over past 3 years from their auckland properties.

 

 

 

 

 

 

 

 

 

 

 

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Yeh the property cycle is 7-10 years in NZ. Given the last peak was 2007, that will make this peak somewhere around 2014-2017. I doubt the actual peak will be 2014 as it needs time to spread outside of central Auckland.... maybe central Auckland will peak in 2014 though as the property market is not one market...

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7-10 years is a bit long.  RBNZ only has data going back to 82

 

peaks, years since last peak

82 Q1
87 Q4 5.75
94 Q3  7
96 Q2  2
03 Q4  7.5

 

You could argue 94-96 was just one big long peak

82 Q1
87 Q4 5.75
95 Q2 7.5
03 Q4  8.5

 

But you're still looking at an average of 7 years, not getting close to 10.

 

So it should have peaked already... well there you go, there's your 10, the current cycle, interupted by the GFC.

 

If you are going to count the little bump at 07 as a peak, then you need to count the one in 2010 as a peak too.

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Are you talking about the 'rate of price increase' or the actual 'house price' dtcarter? (the latter meaning an actual decrease in house prices is what separates one peak from another).

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  • He's looking at 'Rate of increase' eg Q4 2003 peak rate of increase, but peak prices happened 4 years later in 2007.  Might be max year-on-year gains in 2014, but prices likely to keep going up for a few more years. 
  • While NZ (and auck) had peak in Q4 2003, provinces peaked in 2005-2006, lagging a couple of years.

 

 

 

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Yes i was looking at the rbnz price cycle data.

 

If you are going to talk about absolute prices, then the market peaked in

Q4 1990  11 years since data series started

Q4 1997  7 years since last absolute nominal peak

Q1 2008 11 years since last absoulte nominal peak

Q1 2010  2 years since last absoulte nominal peak

Q1 2011 1 year since last absolute nominal peak

 

This data series starts in Q4 79
http://www.rbnz.govt.nz/statistics/key_graphs/house_prices_values/

 

I dont think there are enough data points to draw any meaningful conclusion.

 

If you look at the rate of change, prices increasing faster, then increasing slower (or even dropping) then you can see clear cycles.  To disregard a slowing market simply because it didn't lead to absolute drops in nominal prices serves what purpose?

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"...past cycle price graphs (rbnz),..."

 

Do you have the links?

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These Westpac economists often do good work, I especially like Felix's analysis which is generally accurate.  One glaring omission he has made with this piece, in my opinion, is to not differentiate between the Auckland house market and elsewhere.  To bring Aucklands rate of growth to under 10% yoy you will have to push many of the regions into negative growth (assuming the OCR is used).  I guess he's referring to the nationwide average which tells us little as we have very different markets throughout the country. 

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  • Increasing interest rates put a lot more emphasis on income to meet mortgage payments.
  • Auckland property values compared to both income and rents are already very stretched.
  • Other parts of the country, no so at all.  Often still cheaper to buy a house in palmy then to rent it, and PI's don't need to supplement rent income to meet mortage payments/interest as they do in auckland.
  • All this means auckland property is much more sensitive to interest rate rises. 
  • Likely auckland prices will flat line, and provinces will play catch up.  This is exactly what happened during later part of last cycle (2004-2007), 20% plus yoy gains for provinces (particularly farm/dairy centric cities) while auckland experienced 5% yoy gains.  Could be 10% provinces, 2% auckland this time.  We will see..

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From my link below

(Albert Edwards): Tapering is tightening, which inevitably ends in recession, bailout and tears.

Our warnings throughout last year that an unraveling of emerging markets (EM) was the final tweet of the canary in the coal mine have still not been taken on board. The ongoing EM debacle will be less contained than sub-prime ultimately proved to be.

The simple fact is that US and global profits growth has now reached a tipping point and the unfolding EM crisis will push global profits and thereafter the global economy back into deep recession. Our thesis on how EM would be pushed to crisis was simple, especially as we saw close parallels with the 1997 Emerging Asia currency crisis.

We saw yen weakness further undermining an already weak balance of payments situation in the emerging world as a direct replay of 1997. A strong dollar/weak yen environment is typically an incendiary combination for EM, and so it has proved once again. Having reached tipping point the yen will often rally strongly as it has now and as it did in May 1997. This may or may not delay the impending EM implosion for a few weeks. Indeed the Thai Baht, the first domino to fall in the Asian crisis, briefly rallied strongly (vs the US$) in early June 1997, reassuring investors just ahead of its ultimate collapse.

There has never been any shadow of doubt in my mind that tapering = tightening, and I marvel that the Fed convinced anyone otherwise. A Fed tightening cycle inevitably plays a key role in triggering the next crisis (see below). Plus ça change, hey?

1970 Recession/Penn Central Railroad

1974 Recession/Franklin National Bank
1980 Recession/First Penn/Latin America
1984 Continental Illinois Bank
1987 Black Monday
1990 Recession/S&L and banking crisis
1997 Asian currency collapse/Russian default/LTCM
2007 The Great Recession/Collapse of almost the entire global financial system
2014 Emerging Market collapse/deflation/recession/another banking collapse etc.

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You'll forgive me for being sceptical, I've been promised major economic collapse for years now.  First I was to be worried about the GFC, now resolved.  Then I was to be worried about the European debt crises, now resolved.  Then I was to be worried about QE tapering which has been happening for months now with no meltdown.  Now I'm to be worried about an EM meltdown?  Wont the drop in the value of their currencies support and revive their export sectors?  I suspect that major Japanese exporters are praying for a drop in the Yen. 

 

I'm not saying there won't be another crises, it's in our nature, I just don't think it will be a few emerging markets that don't make up a significant part of the global economy.  NZ just went through the biggest financial crises in 70 years and growth barely slowed.  US is picking up lots of steam.  UK is picking up steam.  China still growing at 7% + per year.  Germany as strong as ever.  It's these major global powerhouses that you need to watch. 

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There was a good graph over on NBR comparing todays house price inflation with 2003 (sorry no link).  They compared the rate of inflation in Auckland, other major centres and the provinces during 2003, today and historical average.  Auckland rate of growth is ahead of the same point in the cycle in 2003 suggesting this boom will be much bigger in Auckland than the naughties boom.  The other centres and provinces however are growing much slower than their yoy growth rates in 2003, implying that the boom this time will be more subdued for those areas. 

 

The problem with the provinces is that many have declining populations (decrease demand) and they are surrounded by open farmland (easily developed and increased supply). 

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"[S]o I look a bit of an idiot most of the time in underweighting equities. It is only in the remaining 10% that the Ice Age call looks correct, when the equity bull phase is totally unwound and equities sink to new lows against ever more expensive bonds. Since our original Ice Age call to underweight equities at the end of 1996, global government bonds (10y+) have outperformed global equities. And though I look an idiot 90% of the time, I am now used to this state of affairs. To be fair, being an idiot 90% of the time isn’’t so bad. It is a full 10 percentage points less than my former partner thought was the case."

-Albert Edwards

 

I recon he'll eventually be right, although might be 5+ years away yet..

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I think you have months

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Great to see some analysis.  Your head is not in the sand Ostrich.

As for the 0.97 and 0.98 Aucklanders.  LOL.

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Auckland housing shortage is a myth and a scape goat to blame for the big moves in house prices.

Rents have not gone up much, the physical number of houses to population is not the issue.

The number of listings of houses for sale to number of active buyers in the market is the real 'supply-demand' that determines pressure on house prices.

No one wants to sell if they think next year their house will be worth 100k more. Everyone wants to buy if they think next year they will be paying 100k more. This simple dynamic is seen during every housing cycle, and is the dominant factor again this cycle.

If you look at trademe listing numbers per population you can see this correlation and the numbers are very interesting:

  • Auckland has 9847 listings and population of 1.38 million = 140 people per listing.

This is a fairly high number of people per listing if you compare with. Eg Rotorua:

  • Rotorua has 952 listings and population of 68900 = only 72 people per listing. So half the supply-demand dynamic as seen in auckland. 

There are however cities so boring that they slip under the media radar, eg Palmerston North:

  • Palmerston North has 489 listiings and population of 82,100 = 168 people per lisiting. Even more of a supply demand imbalance than auckland. 
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Accordingly to those comparitive numbers Simon.  I think you would be coming up with the result that Palmy is in the midst of a price hike.  Obviously it isn't 

Or:

Given the motivations you describe do you see the Auckland phenonenom as a bubble? 

I have never given much credence to the housing shortage idea there.  When rents are stable and house prices rise it is the classic picture of a bubble.

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Yeah I think it shows supply side restraints are similar in auckland and palmy, but palmy hasn't converted the population base into 'active buyers' to create the price hike (yet).

I wanted to show that the 'supply-demand' that is important for house price movements is between 'number of listings' and number of 'active buyers', and less to do with the total number of physical houses.

 

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