House price increases are forecast to slow almost to a halt next year even as interest rates rise – the very danger of which the Reserve Bank has been warning.
Aspiring homeowners struggling to get a foot in the market will be "thrilled if prices level off" – but the threat of the prices actually dropping is another matter entirely.
Point Home Loans mortgage adviser Janet Harris says that despite the Government's housing market reforms in March, many of her clients are still bidding unsuccessfully. "I've been really busy but very few have been able to buy due to silly offers at tender or auctions," she said.
Those few who were successful weren't worried about prices – not once they had got in the door. "But some who haven't bought have told me they were worried about buying and then prices falling though," Harris said.
In the Budget Economic and Fiscal Update, the Treasury estimates annual house price increases will peak next month at 17.3 percent, before dropping to 0.9 percent in June next year.
The anticipated peak is much, much higher than the Treasury was forecasting in its Half Year Update, just before Christmas. And the drop-off is even more precipitous, with the potential to shock complacent and highly-leveraged property owners.
This dramatic cooling is as a result of both the Government’s interventions and macro-prudential tools such as loan-to-value ratio lending limits, the Treasury says. Price rises should then pick up to 2.5 percent year-on-year rise in June 2025, as the border reopens and interest rates remain low.
However, while Treasury continues to predict low interest rates, down on the High Street the three-to-five year mortgage rates have already begun rising and the Reserve Bank has cautioned there could be more rises to come.
That creates the very danger of which Reserve Bank deputy governor Geoff Bascand, who heads the bank's financial stability department, has been warning.
Buyers who have stretched themselves to get into the market will find that the repayments they could sustain at low rates become unmanageable as rates rise; that creates a default risk for them, for the banks and other mortgage lenders, and for the economy.
At the same time, as house prices stagnate or even drop, the new owners can't bank on increased resale value to sustain their equity in the property.
In his speech to Parliament yesterday, Finance Minister Grant Robertson was unapologetic. "This is a sharp adjustment but a very necessary one," he said.
"The Government’s concern is not just that house price growth was unsustainable, but also that the balance was too much in favour of speculators and investors and away from first home buyers.
"Our interventions to remove interest deductibility and increase the bright line test were focused on this goal.
"On the supply side it is essential that we build more houses and, in particular, affordable houses and houses to rent. The reforms in March establish a tax incentive to build, with both the bright line extension and the removal of interest deductibility not applying to new builds."
On the other side of the House, Opposition spokesperson Andrew Bayly was largely in agreement: house price increases needed to drop as close to zero as possible, as long as values didn't begin diminishing, he told Newsroom. His scepticism was more about the reliability of the Treasury forecasts: he was dubious the market would cool off at all.
The Treasury said slower house price growth would dampen the economic recovery and prolong the period of monetary policy support, that would be needed to raise inflation and employment to target.
On the supply side, Robertson and associate housing minister Peeni Henare announced $380m to deliver about 1,000 new homes for Māori including papakāinga housing (part of the 18,000 homes the Government has been promising by 2024) and repairs to about 700 Māori-owned homes.
And $350m from the $3.8bn Housing Acceleration Fund would be ringfenced for infrastructure to enable housing for Māori.
“Our people face constant housing challenges," Henare said. "They are less likely to own their own homes and more likely to face homelessness than their fellow New Zealanders. It has been this way for far too long."
