House Prices Rise Above Trend
Quotable Value NZ released quarterly provisional data on house prices around New Zealand. They showed that average prices rose 2.4% during the December quarter after gaining 3.0% in the September quarter and now lie 10.4% ahead of a year ago. Last year prices rose 3% and they fell 1% in 2000. The latest rise is the highest annual gain since September 1996 but is short of the 14.1% rise recorded for the year to June 1996.
Auckland prices on average rose 2.7% in the December quarter and were up 13.7% from a year ago. They now stand 10.5% ahead of their previous peak in the December quarter of 1997 and have risen 106% the past 10 years versus 69% for NZ as a whole. Nelson prices rose 5% in the quarter and 22% in the year, 50% 10 years, Wellington 3%, 10.6%, 93% Christchurch 1.5%, 5.7%, 38% Dunedin 2.1%, 5.3% and 13%.
On average since 1961 NZ house prices have risen 8.6% p.a., with inflation at 7.1% giving a price-adjusted gain of 1.5% p.a. with Auckland numbers of 9.6% and 2.5% after inflation.
WHY DID THIS HAPPEN?
The seven year high in NZ-wide house price inflation reflects the following.
A surge in population growth to 1.6% in 2002 from 1% in 2001 and an average of 1.1% per annum for the past decade.
Below average interest rates since mid-2001 and extremely low fixed interest rates.
Investor demand driven by discontent with alternative assets plus expectations of continued price gains.
Accommodation requirements of the growing foreigner education sector.
Low dwelling construction in 2000 and 2001.
WHO IS AFFECTED AND HOW?
Borrowers as the high 10.4% gain will make the Reserve Bank wary of high generalised inflation.
Exporters as the less the scope for easing monetary policy the greater the continued interest rate upward pressure on the exchange rate.
Builders as the price gains will draw people to building as opposed to buying existing houses.
WILL THIS CONTINUE?
Over 2003 we expect price gains of 5% and 10% with Auckland prices gaining 10% - 15% due to:
Continued below average interest rates for perhaps all this year.
Investor demand with shares still highly volatile and fixed interest returns very low.
Strong net migration gains over 30,000.
A tight labour market making people feel confident about servicing higher debt levels.
However, come 2004, although we expect NZ’s rate of growth to pick up toward 3% from a forecast 2.2% this year, producing faster jobs growth, it is likely that the rate of house price inflation will fall away in response to the following forces.
Supply catching up with demand.
Higher interest rates
Buyer reluctance to purchase at prices seen as too far above fair valuation.
At this stage we have
no reason to forecast prices declining as they did on
average between the December quarter of 1997 and September
quarter of 1998 by 5.4% for NZ – with Auckland prices off
8.1%. Key factors to watch are interest rate jumps if war
worries disappear, and migration flows.