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Reserve Bank predicts fall in house prices

The Reserve Bank has predicted that house prices will fall from the third quarter of next year.

Thursday, August 19th 2021, 11:57AM 3 Comments

It says prices should fall every quarter to early 2024 when there will be a 3% fall in house values.

In its latest Monetary Policy Statement, the RBNZ said it expects house price inflation to moderate significantly because of low population growth, high levels of house building, higher interest rates and tax policy changes.

“The key drivers of housing supply and demand have turned around,” said Adrian Orr, Reserve Bank governor.

After the first Covid-19 pandemic lockdowns, house prices were predicted to tank, but instead they rose as spending and investment was diverted. “This is a pattern seen in many other countries in response to fiscal and monetary support designed to underpin economic recoveries.

“The magnitude of the recent house price increases across countries is related to the supply situation and the strength of their economy. In New Zealand, housing supply was low and the economy strong.”

Orr says the level of house price growth is unsustainable.

In the bank’s latest projections, house prices are assumed to eventually fall as momentum in the housing market fades. Previously the bank had expected them to plateau.

“While a large fall in prices is possible, at the same time, momentum in the market could prove more resilient than we expect.

“Expectations, and prevailing narratives surrounding the housing market can have a significant bearing on housing demand and house prices.

“The further house prices rise above their sustainable level, the larger the required realignment will need to be,” he adds

The bank’s Monetary Policy Committee noted a number of factors are expected to weigh on house prices over the medium term.

House building is at record levels and there is a significant pipeline of new housing supply coming. Previous large increases in housing supply, particularly in the 1970s, reduced real house prices.

Building consents data suggest by the middle of next year, the total number of houses will be growing at its fastest pace since the early 1960s.

Policy changes significantly easing land-use restrictions will encourage continued strong levels of building.

The committee says it considers the past decade’s undersupply of housing is reflected in existing house prices and a burst of house building will put downward pressure on prices.

Consistent with an easing of housing market imbalances, household sizes are likely to drop, the committee says.

As a hypothetical exercise, it estimates if population growth and the construction of new houses continue at their current rates over the next few years, people per house would return to their 2014 level by the end of 2023.

Other factors moderating demand

• The return from investment in housing will be reduced significantly by the removal of the tax deductibility of interest from rental income and the extension of the bright-line test. Along with tighter LVR requirements, these policy changes have reduced investor buying activity in the housing market. The share of new mortgage lending for investment property has declined to 17%, from 26% at the beginning of 2021.

• As interest rates rise in response to the improving economic outlook, this will dampen demand for housing in several ways. Higher interest rates will make investing in housing relatively less attractive than interest-bearing assets. They will also constrain the ability of new buyers to service debt while leaving enough income for consumption. It also means borrowing capacity will be reduced. In this scenario, demand to purchase houses at current prices will fall.

• The Reserve Bank will be consulting on a proposal to tighten restrictions on mortgage lending at high LVRs. It also intends to consult on introducing debt-to-income (DTI) restrictions and/or floors on the interest rates banks use in their mortgage serviceability assessments. These tools have already been added to its macro-prudential toolbox.

Tags: house prices housing market housing supply property values RBNZ Reserve Bank

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Comments from our readers

On 19 August 2021 at 12:24 pm Jonny Good Guy said:
why do they make so silly comments
the new lending rules in October could ruin the country anyway
On 19 August 2021 at 7:51 pm Chatterbox said:
The review is a "perspective" with a reflection using the term "hypothetical". It might be seen as jawboning or a flawed modelling as there are contrary aspects that do not consider wider factors but not limited to: (a) an increase in interest rates and removal of tax deductibility by the Crown (for the purpose and intent of manipulating a market for the purposes of advantaging a select sector of that market ) may well lead to increased rental rates ( subject to market forces) - as rental rate increases across the board often increase property values after 12 months as accepted formala valuation methodology includes ROR analysis based on rental returns, which in turn lifts property values subject to other factors in the methology as well as capital flows and market forces; (b) the government is in the market buying private property as well and evidence is at auction that it is prepared to pay any price to secure a purchase in order to build a portfolio of property to provide a supply of public housing - the Crown is using taxpayer funds and debt to acquire property that has the conseqence of lifting property values where purchasing is not capped and spending is on an unlimited basis using taxpayer funds contrary to government policies as expressed to taxpayers as voters (c) increasing interest rates can cause capital to flow to other sectors, including mortgage providers, that then fund property (d) if the sharemarket retrenches due to global interest rate increases, or local market reaction, then mass capital will flow out of that market into property searching for safety (other than super/insurance fund managers who soften that capital flow exit by suggesting holding long term is better so as to not affect their management fee income based on FUM size (e) the 'population growth' comment assumes a macro 'population growth' perspective and does not take into account that the NZ government has been (and continues to) promoting incoming-population growth categories that are not normal, but rather are highly capitalised and seeking to immediately buy property for accomodation and investment. That policy does not mimic normal population growth demographics and impacts property demand on a significant scale as many highy capitalised buyers do not need mortgage finance (so interest rate increases are of little concern), and they also find that their capital from offshore (borrowed or deposited in NZ) is close to doubled due to the exchange rate (f) the free trade agreements signed by the government contain a clause for investment that labels property as 'immovable property' (not real estate) as being open to acquire on unlimited basis so long as it is under the foreign ownership limitation approval levels (i.e. residential property focussed therefore) (g) there are now seriously increasing supply chain barriers for providing mass levels of building materials to complete the consents coming online that the article fails to consider. It may be a long time before the demand so commented on will actually crystallise due to supply chain blockades as well as skilled labour supply. That is just a short list of items not considered in the article. Suggesting it is either produced with limited insights or is jawboning.
On 23 August 2021 at 5:58 pm Amused said:
Can I make a prediction also? Once Adrian Orr has served his 5 year term as Reserve Bank Governor ending April 2023 he won't be reappointed.

Like Graeme Wheeler before him Governor Orr has shown that he is out of touch with the New Zealand housing market and what factors actually influence it. It's become painfully obvious now that too many academics are currently employed at 2 The Terrace Wellington with not enough "real world" thinking being done when it comes to setting policy.

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ANZ 4.44 ▲3.39 ▲3.85 ▲4.09
ANZ Blueprint to Build 1.68 - - -
ANZ Special - ▲2.79 ▲3.25 ▲3.49
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ASB Bank 4.45 2.85 3.25 3.55
Basecorp Finance 5.49 - - -
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BNZ - Mortgage One 5.15 - - -
BNZ - Rapid Repay 4.60 - - -
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BNZ - Std, FlyBuys 4.55 3.45 3.85 4.15
BNZ - TotalMoney 4.55 - - -
CFML Loans 4.95 - - -
China Construction Bank 4.49 4.70 4.80 4.95
China Construction Bank Special - 2.65 2.65 2.80
Credit Union Auckland 5.95 - - -
Credit Union Baywide 5.65 3.95 3.85 -
Credit Union South 5.65 3.95 3.85 -
First Credit Union Special 5.85 2.95 3.45 -
Heartland Bank - Online 2.25 1.85 2.35 2.65
Heretaunga Building Society 4.99 3.80 3.90 -
Lender Flt 1yr 2yr 3yr
HSBC Premier 4.49 2.19 2.45 2.69
HSBC Premier LVR > 80% - - - -
HSBC Special - 2.25 - -
ICBC 3.69 ▲2.45 ▲2.85 ▲3.15
Kainga Ora 4.43 2.88 3.28 3.59
Kainga Ora - First Home Buyer Special - 2.25 - -
Kiwibank 3.75 ▲3.80 ▲4.00 4.34
Kiwibank - Offset 3.75 - - -
Kiwibank Special 3.75 ▲2.95 ▲3.15 3.49
Liberty 5.69 - - -
Nelson Building Society 4.95 2.99 3.24 -
Lender Flt 1yr 2yr 3yr
Pepper Essential 4.79 - - -
Resimac 3.39 2.98 2.79 3.29
SBS Bank 4.54 2.99 3.39 3.59
SBS Bank Special - 2.49 2.89 3.09
Select Home Loans 3.49 3.34 2.99 3.34
The Co-operative Bank - First Home Special - ▲2.65 - -
The Co-operative Bank - Owner Occ 4.40 ▲2.85 ▲3.25 ▲3.49
The Co-operative Bank - Standard 4.40 ▲3.35 ▲3.75 ▲3.99
TSB Bank 5.34 3.35 3.75 4.05
TSB Special 4.54 2.55 2.95 3.25
Wairarapa Building Society 4.99 3.55 3.49 -
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Westpac 4.59 3.45 3.85 4.09
Westpac - Offset 4.59 - - -
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Median 4.54 2.95 3.25 3.49

Last updated: 29 September 2021 8:51am

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