GSJB Were has assessed the state of the housing market in New Zealand, concluding housing prices have moved too far ahead of fundamentals.
Tuesday, August 23rd 2005, 8:38AM
by The Landlord
As a result, the broker is anticipating housing prices to fall by 5% over the next 12 months, a move that would return prices to levels more appropriate given recent mortgage rate increases, slowing net migration and employment growth, and falling rental yields.
The broker notes New Zealand property prices have enjoyed a similar increase to those in Australia and the UK in recent years. But while higher interest rates have slowed excess demand in those markets, there has not yet been a discernable impact in New Zealand given a high proportion of fixed mortgages.
But as the broker points out, many of these mortgages are now or are soon coming due to be refinanced, suggesting demand is likely to slow going forward.
Additionally, on the broker’s estimates housing prices have looked overextended since last year, but worsening economic conditions in recent months means the conditions that pushed house prices to record levels are now unravelling.
This has led the broker to suggest housing prices are not sustainable, especially as there remains downside risk to the NZ economy. As GSJB Were notes, income is traditionally an important driver of housing prices, but the relationship in the New Zealand market has broken down and households are now highly indebted. On the broker’s calculations, by the March quarter next year households will require 12.7% of their disposable income to service debt, up from 11.1% in the December quarter last year.
With mortgage rates rising faster than both incomes and rents, households are hit by the double impact of low yields and rising debt-servicing levels.
Properties therefore become less attractive for purchasing, meaning the market’s excess supply is unlikely to be quickly mopped up. A slowdown in net migration also doesn’t help, as the broker notes while a surge in migration in 2003 created a demand-side push for housing prices this has since moderated.
