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Tentative Signs Of Housing Confidence Improvement

Housing Confidence Showing Tentative Signs Of Improvement

Confidence in the housing market showed tentative signs of improvement during the three months to October. Although confidence overall improved only slightly, the improvement occurred in all regions covered by the survey for the first time since January 1999.

At the national level, a net 34% of respondents thought it was a good time to buy (made up of 47% who thought it was a good time to buy less 13% who thought it was bad) according to the latest ASB Bank Quarterly Survey of Housing Confidence. This compares with a net 28% in the July quarter.

“Although the rise in confidence is not large enough to allow us to say that it’s turned the corner,” says ASB Bank economist Rozanna Wozniak, “it nevertheless seems that the trend has bottomed.” Confidence has been relatively stable for the last year.

Ms Wozniak noted that housing confidence is different from consumer and business confidence in that it remains firmly in positive territory, with optimists comfortably outweighing pessimists.

Confidence in Wellington continues to lag

Although the rise in confidence occurred in all regions, the level of confidence in Wellington remains lower than other areas. Two key factors account for this:

 significant price rises, which have eroded affordability; and
 although Wellington respondents remain more optimistic about house prices than other regions, there is nevertheless a growing belief that these price rises will not continue

Net confidence in Wellington rose from 7% to 16%. This compares with levels of between 31% and 41% for the rest of the country.

Price Decline Loses Momentum

House prices edged lower during the September quarter, but the rate of decline appears to be slowing. House prices declined 0.5% nationally, smaller than the June quarter’s 1.0% fall. That’s a fall of 1.5% for the year and 2.7% from the peak in late 1997 – modest declines in the face of the weakness we have experienced in both real estate turnover and building activity.

“Our belief is that the market has been stagnating, rather than continuing to deteriorate,” Ms Wozniak said.

The regions appear to be faring better than the main centres, with Auckland, Wellington and Christchurch showing price declines overall for the quarter, while Hamilton, Palmerston North, Nelson and Dunedin recorded increases.

Dwelling Consents in Sharp Decline

Dwelling consents during the September quarter tumbled 33% nationally compared with the same quarter last year. Many builders face margin pressures through falling demand and rising costs.

Despite the reduction in building activity, excess supply from previous high levels of activity continues to dampen house prices. However, new house prices do not appear to have suffered as badly as existing homes.

“Home buyers across most of New Zealand have continued to show a strong preference for new homes,” Ms Wozniak says.

Interest Rates Close to Peak

Further modest interest rate rises remain a possibility, despite a soft economy. Although growing inflationary pressures are evident, it is too soon to determine whether these pressures will result in unacceptably high “underlying inflation” ie excluding one-off effects such as petrol price rises.

Hence, it’s also too soon to say that interest rates have peaked, although this peak is near.

As we move into the second half of next year, inflation concerns are expected to reduce. We believe that it will become clear that any increase in underlying inflationary pressures will be both modest and temporary, opening the way for the Official Cash Rate to edge lower around late 2001.

Outlook Subdued

The usual spring increase in real estate turnover has been very slow to surface this year and turnover has remained weak.

“However, in light of recent house price data there is no reason to expect a significant further decline,” Rozanna Wozniak says.

“The near term outlook is for relatively stable prices. The challenge will come in sorting out a few issues before next winter. The building industry is facing increasing cost pressures, but at the same time the slowdown in activity will reduce the effect of over-supply. Confidence in the economy should gradually improve as the domestic sector sees some trickle-down benefits from the growing export sector, while interest rate concerns should reduce during the second half of next year.”

For more information, contact:

Rozanna Wozniak, ASB Bank Senior Economist, ph. (09) 374 8562 or (025) 956 350.

Released for ASB Bank by Network Communications (Peter Hallwright),
ph. (09) 379 3154. ABL3MR152

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