House prices not ridiculous: BNZ economist

BNZ chief economist Tony Alexander has looked at key house price drivers and concluded that house prices might be exactly where they should be, contrary to sections of public opinion bemoaning them as inflated.

Monday, April 23rd 2007, 9:45AM

by The Landlord

He says migration levels will continue to drive housing demand and prices. “With high awareness that migration inflows are continuing at high levels, investors quite reasonably anticipate housing demand continuing to grow and deliver quite reasonable capital gains,” says Alexander.

Interest rates are lower and less volatile than in the past, and job security has structurally improved, the economist says. By comparison, the floating rate range from 1982 to 1992 was a terrible 8.9% to 20.5% (using monthly averages which hide the true high for many people near 23% in 1987).

Sharply rising construction costs also underpin house prices, Alexander says. “Construction costs are likely to keep rising at a rate above general inflation through requirements for greater housing energy efficiency, builder registration etc. At the same time land prices have jumped substantially assisted by council policies aimed at limiting urban sprawl.”

He says there are also other, less significant factors that have pushed prices higher. “There has been a plethora of New Zealand and foreign television programmes focusing on the fun of property renovation, purchasing and investment in recent years. Increased awareness of the property market is likely to have encouraged some people to become investors,” says Alexander.

Measures aimed at getting first-time buyers on the property ladder, Alexander says, actually boost prices rather than supply. Instead, he says, the problem should be tackled by increasing the supply of lower priced housing, reducing the cost of construction and removing other buyers from the market.

“Then again, maybe this is more about young buyers having to realise that after a lifetime (for them) of easy credit access to consumer goods and services the reality of struggling as previous generations have done is simply manifesting itself.”

He suggests first homebuyers may have to live further away from their work than they want or move to other regions. “The route toward home ownership for the easy credit generation seems logically to be buying and working in the regions,” says Alexander.

“Eventually you’ll build up enough housing equity to help fund a house purchase in a city further down the track if one wants to pursue a career in a bigger smoke.”

“And finally, maybe for this current debt-hungry generation it means cutting down on the cell phone use to limit the monthly bills, cutting foreign travel, putting off getting a modern car, plasma TV, latest gaming console, latest phone, and cutting 20 $3.50 cups of coffee a week until after the deposit is raised for a house.”

« Property investors refocus on cash flow

Free Investment Property Showcase Events: Auckland, Wellington and Christchurch »

Special Offers