Following two years of double-digit house price increases, lending restrictions and rising mortgage rates look set to slow house prices in 2017. In this month’s finance article, we take a closer look at the influences that could affect the housing sector in 2017, following Westpac’s latest Home Truths report which outlines predictions of a more subdued housing market outlook for the year ahead.
Property increases in 2016
In the later part of 2016 Auckland house price rises began slowing, while in other parts of the country property values experienced a boost towards the end of the year. This was especially evident in the Queenstown area, where average values reached the $1 million mark for the first time ever.
Looking ahead to 2017, acting chief economist at Westpac, Michael Gordon, says there are three competing arguments for a softer housing market this year. In its latest Home Truths report, the bank has revised its downward forecast house price growth to just 5%, down from 11%.
"There’s been growing discussion recently about whether the housing market has reached a turning point," he said in Westpac’s last monthly housing roundup.
A softer housing market
To guide any policy decisions about housing during 2017, Mr Gordon said it was important to distinguish between the three arguments pointing to a softer housing market.
"One is that the latest round of loan-to-value ratio [LVR] restrictions has finally broken the back of the housing market. Another is that mortgage rates are now rising instead of falling. Lastly, some have argued that the housing market is simply a bubble ready to burst," he said.
Tough lending restrictions
The third round of LVR restrictions announced in July 2016 have clearly had an impact on the activity in the housing market. However, while the LVR restrictions limit the number of potential buyers, they have little impact on the maximum price that buyers are willing to pay. Mr Gordon believes this is being driven by factors like rental yields, borrowing costs and tax on investment properties, none of which are affected by LVR restrictions.
According to figures released by REINZ (Real Estate Institute of New Zealand), house sales up to November 2016 were down more than 16% from their peak in April 2016. The number of homes available for sale also edged up largely as a consequence of the slowdown in sales.
"The number of new listings remains near its lows, indicating that homeowners are under no pressure to sell into a softening market," Mr Gordon said.
Rising interest rates
Mortgage rates have declined steadily over the past two years following cuts to the official cash rate (OCR), steadily underpinning the price that investors are willing to pay for properties, says Mr Gordon.
That looks set to change, however, as global interest rates are rising and New Zealand is likely to follow suit. The US election and Donald Trump’s surprise election also had an impact, while a slowdown in deposit growth meant local lenders were having to turn to more expensive sources of funding.
"Consequently, mortgage rates have risen by around 20 basis points from their lows for a two-year fixed term, and around 40 basis points for a five-year term," Mr Gordon said.
Mr Gordon says he expects the OCR to remain unchanged in 2017, but longer-term interest rates would face upward pressure during the year, the key reason Westpac is forecasting a more subdued pace of house price growth this year.
In talking about the housing bubble issue, Mr Gordon explained there were two main issues that could trigger a collapse in land prices; the first was a failure to realise the full value of the land, either through renewed restrictions on building or by building the wrong kind of homes, and the second was demand for housing falling short of expectations.
"Even so, those [two] forces are unlikely to come to bear quickly," he said.
The ongoing issue of a housing shortage combined with the building industry’s limited capacity suggests there is little risk of an oversupply of homes any time soon.
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The start of a new year is a good time to take a look at your financial situation. Mortgage Express offers a financial health check to all of its clients; our advisers take a closer look at your current situation to ensure you have the best deal to fit your requirements. Get in touch if you’d like to find out more or if you have questions about the property market in 2017.