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Lower prices mean budget squeeze

Flatter house prices are on the cards this year, but any decline in prices will have broader economic consequences, Infometrics is predicting.

Thursday, April 13th 2017, 11:00AM 1 Comment

by Miriam Bell

The economic consultancy has just released its latest forecasts and they show house prices falling in the second half this year to sit 2.7% below their December 2016 level.

This decline will be due to the dampening effect of tighter mortgage lending conditions and higher interest rates.

Infometrics chief forecaster Gareth Kiernan said the emergence of flat or falling house prices within the next few years will undermine consumers’ willingness to spend.

At the same time, the discretionary portion of households’ budgets will be squeezed as interest rates gradually rise from their historic lows.

These effects will be particularly acute in Auckland, where house prices are highest, he said.

“An increase in mortgage rates from 5% to 6% adds almost $200 to fortnightly repayments on a 25-year mortgage for someone who has bought the average Auckland house with a 20% deposit.

“The result of this squeeze is persistently weak growth in household spending from 2018 through to early 2021, with per-capita growth nationwide holding below 1.0%pa throughout this period.”

People that have heavily leveraged themselves to purchase property are likely to find that increasing debt-servicing costs cause a significant degree of financial stress, Kiernan warned.

“Re-entering the workforce or taking on additional hours to boost their income shape is one way that people can adapt as mortgage rates track upwards.”

Meanwhile, Infometrics sees headwinds building for the residential construction sector.

The sector is considered one of the current drivers of economic growth but it is already struggling with capacity pressures.

Kieran said the safety net of rising house prices have acted as a safety net for the sector.

“They encourage developers to push ahead with new projects as they expect any building cost overruns to be covered by higher sale prices at the end of construction.

“But, with the wind having been taken out of the housing market’s sails, that financial buffer looks to be less assured.”

Further, Infometrics believes the annual new dwelling consent total slipping back from its current level of 30,162 in the year to February 2017 to below 29,000pa in the March 2018 year.

This is a worrying prediction, given New Zealand, and particularly Auckland’s, ongoing housing supply shortage.

In a broader economic sense, Infometrics expects greater price pressures both domestically and internationally and have revised their inflation forecast for 2017 up by 0.2% to 1.7% per annum.

Kiernan said that, against this backdrop, the Reserve Bank is likely to begin raising the OCR by the middle of next year.

“But these OCR increases will only be gradual, as ongoing elevated levels of net migration and high labour force participation will prevent capacity pressures getting as out of hand as they did in previous business cycles.”

Read more:

Build more bloody houses – Little

Shortfall to get worse before it gets better 

« Shallow LVR effect likely - QVAuckland’s fastest rising suburbs »

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Comments from our readers

On 15 April 2017 at 12:09 pm Gutz said:
I would like to make a comment about the consent process I have been trying to build a 60m2 minor dwelling on the rear of a property I own in Massey West Akld I did the prelim engineering and survey work in Sep of 2015 We submitted the plans on 6/1/2016 I have been waiting 15 months for a consent I dont have the time here to go in to the crap I have had to endure but rest assured here is the reason we have no houses in Akld Brett Carroll

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Lender Flt 1yr 2yr 3yr
AIA 4.55 3.19 3.19 3.49
AIA Special - 2.69 2.69 2.99
ANZ 4.44 3.15 3.25 ▼3.39
ANZ Special - ▼2.55 ▼2.69 ▼2.79
ASB Bank 4.45 3.19 3.19 3.49
ASB Bank Special - 2.69 2.69 2.99
Bluestone ▼3.49 ▼3.49 ▼3.49 ▼3.49
BNZ - Classic - ▼2.55 2.69 2.99
BNZ - Mortgage One 5.15 - - -
BNZ - Rapid Repay 4.60 - - -
BNZ - Std, FlyBuys 4.55 3.25 3.29 3.59
Lender Flt 1yr 2yr 3yr
BNZ - TotalMoney 4.55 - - -
China Construction Bank 4.49 4.70 4.80 4.95
China Construction Bank Special - 2.65 2.65 2.80
Credit Union Auckland 5.45 - - -
Credit Union Baywide 5.65 4.75 4.75 -
Credit Union South 5.65 4.75 4.75 -
First Credit Union Special 5.85 3.35 3.85 -
Heartland 3.95 2.89 2.97 3.39
Heartland Bank - Online - - - -
Heretaunga Building Society 4.99 4.35 4.45 -
HSBC Premier 4.49 2.60 2.65 2.80
Lender Flt 1yr 2yr 3yr
HSBC Premier LVR > 80% - - - -
HSBC Special - - - -
ICBC 3.99 2.58 2.68 2.79
Kainga Ora 4.43 3.29 3.39 3.85
Kiwibank 3.40 3.40 3.54 4.00
Kiwibank - Capped - - - -
Kiwibank - Offset - - - -
Kiwibank Special 3.40 2.65 2.79 3.25
Liberty 5.69 - - -
Nelson Building Society 4.95 3.45 3.49 -
Pepper Essential 4.79 - - -
Lender Flt 1yr 2yr 3yr
Resimac 3.49 3.45 3.39 3.69
SBS Bank 4.54 3.29 3.19 3.49
SBS Bank Special - 2.79 2.69 2.99
The Co-operative Bank - Owner Occ 4.40 ▼2.69 ▼2.75 ▼2.99
The Co-operative Bank - Standard 4.40 ▼3.19 ▼3.25 ▼3.49
TSB Bank 5.34 ▼3.35 3.49 3.79
TSB Special 4.54 ▼2.55 2.69 2.99
Wairarapa Building Society 4.99 3.75 3.99 -
Westpac 4.59 4.15 4.09 4.49
Westpac - Offset 4.59 - - -
Westpac Special - ▼2.55 2.69 2.79
Median 4.55 3.19 3.22 3.39

Last updated: 13 July 2020 7:38am

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