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House prices to rise 5-8% next two years before residential investment growth kicks in to boost supply, Treasury says; Picks earlier OCR hikes than RBNZ, Current account deficit to widen

House prices to rise 5-8% next two years before residential investment growth kicks in to boost supply, Treasury says; Picks earlier OCR hikes than RBNZ, Current account deficit to widen

By Alex Tarrant

Rapid population growth and low interest rates are set to keep housing demand high over the next couple of years, although price rises are set to fall off as supply eventually reaches a level closer to demand, Treasury says.

Budget 2017 picks the QV house price index to be up by an annual 5.1% in the year to June 2017, lifting to 7.8% in 2018, then falling to 3.9%, 3.1% and 2.2% annually over 2019, 2020 and 2021. In early May, the latest QV house price index showed prices were flat over the last three months, with the annual change at 11%.

“Further out, most of the temporary headwinds are expected to subside and pent-up demand for housing returns to the fore (given rapid population growth and relatively low interest rates), resulting in a further pick up in residential investment,” Treasury said.

“House price growth is anticipated to pick up once more in 2018 then ease from 2019 onwards as supply increases to meet demand,” Treasury said.

Residential investment growth is expected to plummet from 6.7% in 2017 to 0.3% in 2018, before rising to near 9% through 2019 and 2020 – representing the increase in supply Treasury is hoping for.

Meanwhile, Treasury’s forecast for the 90-day bank bill rate indicates it is expecting the Reserve Bank of New Zealand will have to raise the Official Cash Rate earlier than the Bank itself is picking.

The 90-day rate typically sits 25-30 basis points above the Official Cash Rate. It is forecast by Treasury to rise from 2% in 2017 to 3.9% in 2021.

The track implies Treasury forecasts the OCR being at 1.75% in mid-2018 before rising to potentially 2.5% in June 2019, 3% in 2020 and 3.5% in 2021. The Reserve Bank of New Zealand is currently forecasting the OCR staying on hold at 1.75% to September 2019 at the earliest.

Treasury is picking annual Consumers Price Index increases of between 1.6% and 2.2% over the next four years.

Other key forecasts include:

  • Real GDP per capita growth to fluctuate between 0.9% and 1.8% between 2017 and 2021.
  • Unemployment falling from 5% in 2017 to 4.3% in 2021
  • Annual wage growth of 1.2% in 2017 to rise to 2.6% in 2018 then falling away to 2.1% by 2021
  • Current account deficit to widen from 2.8% of GDP in 2017 to 3.9% of GDP in 2021
  • Merchandise terms of trade annual growth to plummet from 6.2% in 2017 to -0.2% in 2018 then only recovering to between 0.0% and 0.4% the next three years
  • Core Crown tax revenue to stay flat at 27.7% of GDP from 2017 through 2021
  • Core Crown expenses to fall from 28.8% of GDP in 2017 to 27.5% in 2021
  • Total Crown OBEGAL rising from a surplus of $1.6bn in 2017 to $7.2bn in 2021 (0.6% of GDP to 2.2% of GDP)
  • Net core Crown debt falling from 23.2% of GDP in 2017 to 19.3% of GDP in 2021
  • The TWI to stay in the 76-77 range until falling to 74.7 in 2021

Below are Treasury comments on several of its forecasts:

House prices and residential investment

Rapid population growth and low interest rates increase demand for housing. In the near term, indicators including building consents suggest that real residential investment and house price growth will remain around current levels owing to a range of factors that are judged to be largely temporary. Factors explaining the recent slow-down in residential investment include the impact of tighter loan-to-value ratios, uncertainty around the Auckland Unitary Plan, capacity constraints in the construction sector (particularly for skilled labour) and tighter credit conditions (particularly for developers).

Further out, most of the temporary headwinds are expected to subside and pent-up demand for housing returns to the fore (given rapid population growth and relatively low interest rates), resulting in a further pick up in residential investment. House price growth is anticipated to pick up once more in 2018 then ease from 2019 onwards as supply increases to meet demand.

The recent slow-down in residential investment growth explains much of the lower momentum in near-term growth in the forecasts. There is considerable uncertainty associated with the judgement that this slow-down will be temporary. See the Recent developments in residential development box on page 13 for further discussion.

Housing market developments have been reflected in growing household debt, which reached a new high of 168% of household disposable income at the end of 2016. If income growth were to slow significantly or if interest rates were to rise sharply, debt servicing could become difficult for some households. This has the potential to constrain GDP growth as households adjust by reducing consumption and residential investment.

Net migration

Net migration has continued to outpace expectations, with annual net migration rising to 71,900 in the year to March 2017. Net migration is assumed to hold up at a higher level than forecast in the Half Year Update given New Zealand’s relatively favourable economic conditions and the persistent strength of recent net inflows, peaking at 72,500 in mid-2017.

Thereafter, net migration inflows are assumed to ease. Flows of New Zealanders are assumed to return to their long run average net outflow in line with real wage differentials between New Zealand and Australia. Net inflows of nonNew Zealanders are assumed to fall as New Zealand’s attractiveness relative to other locations declines, and as some recent migrants leave (eg, students). Net migration is expected to add 212,000 people to the population over the next four and a half years, similar to the gain over the past four and a half years. Relative to the Half Year Update, net migration is assumed to decline more gradually (adding around 67,000 more people), with risks to the forecast present in both directions.

Population growth is a key driver of economic growth. Average GDP per capita growth over the forecast period (1.3%) is similar to that forecast in the Half Year Update (1.4%), but the level of real GDP per capita is lower throughout, as revisions to history have led to a lower starting point (see the GDP revisions and their implications box on page 9). Scenario Two in the Risks and Scenarios chapter explores the implications should migration levels deviate significantly from those assumed.


Unemployment is forecast to remain flat over the year ahead, as rapid labour force growth (from a combination of high working-age population growth and record-high participation rates) is balanced by robust employment growth (with 215,000 additional people employed over the forecast period), before steadily declining to the long run unemployment rate of 4.25%. Wage growth is relatively modest in the near term, reflecting some spare capacity in the labour market, past low inflation and relatively weak productivity growth, before picking up to over 2% in mid-2018 as price inflation picks up.

Compared to the Half Year Update, employment growth is stronger over the forecast period. However, the labour force is forecast to increase at a faster rate, with higher participation rates and working-age population growth, meaning spare capacity in the economy is not used up as quickly as previously anticipated. This translates into a relatively higher unemployment rate and weaker wage growth over the remainder of the forecast period relative to the Half Year Update, and points to a softer near-term picture of non-tradables inflation.

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While this is all good, the public would be far better off for the Treasury to explain how their forecasts and modelling are calculated, along with with the assumptions and limitations. That way, the general public would have a much greater awareness of what it all means.

Its a pity really because while we have little influence over the cost of money worldwide , there are some things we are able to control ...............we are able to control inward migration .

Need Solution : Vote for Change.

Use the tool that democracy provides wisely or repent and this time will be point of no return if national voted back.

Think and vote

Well I'm thinking that National produced a budget surplus which allows them to give tax breaks to the lower income families and more accommodation supplement to low-end renters.

Think and vote


Anyone can have a budget surplus if you allow unfettered migration, foreign cash for our assets and offer residency for cash.

Then cut costs on infrastructure, roading, transport, schools, hospitals and social welfare.

The big question is do you have more money in your pocket after paying the bills, is your quality of life improving, is the country going in the right direction.

I dislike the way homelessness has increased, I dislike the way housing is getting out of reach for normal NZers, I dislike the way traffic has increased, I dislike the way our youth are referred to as druggies and no hopers, I dislike our low wage economy, I dislike the ques in our hospitals. I left the UK after a 10 year stint, but now NZ is feeling like the UK and thats not great.

I despair for what National has done to our country.

superbly put

I'm just blown away by the number of times a self licking icecream can lick itself...

Bang on swapcrate. The only good thing is that our children don't remember what NZ used to be like. For them this is normal.

Would it be a good guess that you own investment properties Yvil? I do as well, but as I'm a born and bred NZ'er I care about the big picture not just my pocket. High immigration and overseas investment in land and houses has made me rich on paper. Taxpayer sponsorship of my rental returns also helped make me rich. Unfortunately this wealth is at the expense of my younger countryman who missed out on the lolly scramble.
Thankyou National for helping me become wealthy but I will vote with my conscience, I will be voting for reduced immigration and no more foreign investment in established housing and productive land.

So much for all the clap-trap comments posted here recently about an imminent crash in house prices. Of course, no crash is about to happen....

Chances are that house prices will increase a few percent over the next year or two - rather than fall through the floor. And that will apply in Auckland, Wellington and other centres across New Zealand.

Where did you buy your crystal ball from?

From a shop called The Treasury. They have the smartest people, access to the best data and no vested interest or political agenda in their forecasts.

Hi Independent_Observer,

No crystal ball required.

Just careful analysis and monitoring - combined with prudent judgement.

Its very impressive stuff - and you're so certain! Please, tell me about your bias..

Please enlighten us with your "analysis and monitoring - combined with prudent judgement."

I think that is translation for: 'I read the NZ Herald, listen to Mike Hosking and follow the National party twitter feed'.

With that analysis.

How do people buy houses when house prices are increasing when lending is already at 10-13 times income.
Will Banks lend more is it to risky for them. I think risky. In UK I could only get 4 times so 13 times is in la la land.
Interest rates are going up because cost of borrowing will go up.
Immigration is increasing but the type of people that immigrate are low skilled and cant afford the cost of our houses.
Capital controls have been placed on Chinese which seem to have a lot of influence on the market.
What happens if Labour or Winston get in and they stop foreign investment?

For immigration to have an impact we need to be allowing people in that can afford property $600,000 plus. But these type of immigrants are few and far.

The only way I can see house prices increasing is if NZers got a sudden bump in their take home pay. But that bump would need to be significant.

Personally, Im looking to be debt free, so I have more disposable income for my business and to holiday, quality of life in other words. I pity these people who have all this debt, its a huge amount of pressure.

Your hoping people are tied down to banks in debt for the rest of their lives at greater then 13 times income and housing gets further away from FHB. Nice.

You been tuning into Mike Hosking?

So will the Banks lend above 13 times income.

They are in denial over immigration returning to its long-run net outflow - Australia is significantly less attractive than it used to be for many reasons including the way Kiwis are treated over there, the taxation regime and the weak $AUD. Anyone with a family will now struggle to send their kids to Uni with the proposed huge increase in the fees from next year. NZ's economy is going well and we are far away from the worries of the world, pollution, nuclear risk, over-population, terrorism and the global rat-race.

Also depends what role easy access to Australia played in attracting many to New Zealand. I know a number of immigrants to NZ who then migrated to Australia soon after gaining their NZ citizenship.

If forecasts were right, we shoud not have housing crisis.

Treasury would probably have more accurate data than many of the Nay Sayers that continue to preach the housing market nationwide including Christchurch is going to drop.
I beleive that prices will be flat around the country for the next 6 months and then will rise again at the end of the year and into next, especially,in Chch as it is becoming a more popular city by the day!

But you keep saying don't believe what economic forecasters say - you say not to believe and do the opposite. Which is it .........

Now I know your are nothing more than a common old garden fraud. The more interesting question is why do you event bother commenting. I am fascinated to know why.

Market price means there is a 50-50 chance of the next movement being up or down. However for house prices to go up significantly there has to be a new source of money. It could happen and of course it could go down. The dramatic risk would be something like a volcano. More likely a freeze on immigration, Australia looking good, mortgage rates back to long term average (>7%) all would drop house prices and judging by other countries they could drop by a half. However any price change will vary by location. What is most unlikely is a solution to transport problems in Auckland so the nearer the centre and the more traditional the house the better.

They clearly don't have a clue what's going on or any grip on reality. Vote for change!

Finance Minister Stephen Joyce's Budget today was remarkably astute.

Clearly, Joyce (and Bill English) are smart operators - with their fingers on the pulse. (They may not look pretty but they're certainly intelligent.)

Unsurprisingly, Labour is yet to come up with a convincing rebuttal.

Whatever were National's chances yesterday of a victory in September, I reckon those chances are considerably better tonight.

Just to be clear, I have no allegiance to the National Party - but I'm willing to concede that today's Budget is a political masterstroke.

You must be was totally lame and underwhelming!
Who's happy about this one? I'd much rather see more decent infrastructure investment than the $20 extra I'll get in my pocket from April next year ....
For low-middle income earners it's just a catch up sop, that isn't even a catch up - one step forward, two steps back....

@tothepoint: See just goes to show that Real Estate Agents will do or say anything to keep the ponzi scheme going. Problem is for National that the housing market is far beyond their control, doesn't matter how many house they don't build, prices are still heading South!

China's Stocks, Yuan Erase Losses Triggered by Moody's Downgrade

With that forecast potential increase in house prices, the RBNZ should be implementing DTI limits on lending asap.

It's just guesswork, with a veneer of 'education'.
Read 'Black Swan'

Fritz - that's a big ask. When I read Taleb's book it failed to state that housing investment by Darklords is a government backed, risk free asset class that will provide year on year capitals gains with significant tax benefits. So its obviously factually incorrect. As Tothepoint puts it, Taleb must have failed in his 'analysis and monitoring - combined with prudent judgement' when putting the book together.

I think you need to read Taleb again. or buy a new brain

You may want to get your sarcasm-o-meter re-calibrated.

oh, whoops, sorry. Too much red wine :)

... hmmm ... a double post just a Kurd .... I would never had anticipated that ...

Taleb would be proud of me ...

... a " black swan " ... if , ever there was one ...

... I am reading Taleb's " Anti-Fragility " again ... for the first time ...

Red wine would assist me greatly ...

ha ha
yes Taleb and red wine go together like...

"House prices and residential investment

Rapid population growth and low interest rates increase demand for housing."
this from Treasury;
really, this is sloppy thinking or writing or both. Of course population growth increases demand for housing- pretty obvious really. However low interest rates do not increase demand for housing per se (in the sense of putting a roof over heads) They increase the demand to purchase property as opposed to rent it. It is an important distinction when the article is about house prices.

What they really mean to say is that in a low interest rate environment NZ citizens have no self control and the banks ownership of outcomes, as a result Kiwis have gouged themselves on debt of late, much like a fat kid in a sweet shop. The average kiwi had no idea when to say no and we now have some of the highest personal debt levels in the world, the highest house prices in the world, and a growing level off poverty among the poor who are being left behind in what is a fallacy of paper wealth created by capital gains in a speculative housing market.

But hey, we wouldn't want to actually deal with the facts now would we?

So the figures indicate that the median Auckland house price will be 1,015,000 by June 2020, inflation will be higher than wage growth in those years ,so finding the extra $145,000 will flow from the hills and Auckland household debt to disposable income will point inexorably heavenward.

Yes, yes, supply and demand. Sure. Thanks for that Treasury.
Just one question though......Where is the money for increasing house prices going to come from?

Foreign Capital has recently withdrawn from many real estate markets, banks have got some lending problems with insufficient deposits and NZ wages are not going up fast enough to allow wage-earning NZ-ers to afford house prices.

Is the assumption here, that landlords have infinite economic resources and appetite to buy up all the existing and future housing stock at ever increasing prices too because frankly, who else could possibly be buying?

"The 90-day rate typically sits 25-30 basis points above the Official Cash Rate. It is forecast by Treasury to rise from 2% in 2017 to 3.9% in 2021." Does this mean anyone buying a house today will be paying 1.9% more on their mortgage in 4 years time? If true how many homes will be repossessed from hard working honest families?

"Foreign Capital has recently withdrawn from many real estate markets, banks have got some lending problems with insufficient deposits and NZ wages are not going up fast enough to allow wage-earning NZ-ers to afford house prices."

Hi gingerninja,

Your comments above are about short-term factors. With property, too much focus on the short-term is shortsighted. And that's where people notoriously come adrift in their decision-making.

Successful/effective property ownership/investment is about thinking long-term.


My comment is in response to the Treasury estimate about increase in house values. Which is what this article is about.

I make no comment about the fundamentals of property investment as a long term investment. No comment about yields.

I wonder why you would read or assume that about my comment?

My only comment about landlords is that they may be one of the few remaining groups who can continue to buy property in NZ at increasing prices, and only then, if they have the 40% deposit and can secure finances for the rest. Why do you infer in that any comment about the merits of long v's short term property investment?

Question - how do you know they are short term factors, they could become long term factors. It is well established that capital is currently effectively blocked from exiting China and that New Zealand is currently not self funding for it's capital needs (and there is a limit to how much New Zealand banks can borrow overseas). Current wage growth is minimal for most and it is taking a lolly scramble / election bribe ( depending on who you talk to) by the government to improve things.

Your reply is oddly condescending and patronizing as if you have all the answers. Somehow I doubt you do.

Hi Gingerninja & BadRobot,

I'm happy to let readers draw their own conclusions.

To be fair tothepoint, you havn't really offered anything to draw a conclusion. Other then say property prices will increase Ad infinitum, and its a long term gain.

All people are doing is relying on rich immigrants to push up prices, foreign investment to continue, interest rates to stay low, with the banks lending to very high risky borrowers. That just sounds like a house of cards.

House value in Remuera to fall 50% over the next year.

Days to the General Election: 23
See Party Policies here. Party Lists here.