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House price inflation likely to cool slowly

While house prices are currently greatly inflated compared with the long-term trend, it's likely to take a long time before they adjust back to trend, says Andrew Gawith, an economist at Infometrics.

Monday, September 19th 2005, 6:54AM

by Jenny Ruth

Infometrics has analysed data on house prices going back 75 years.

"There are long periods where house prices stay away from the trend," Gawith told the New Zealand Mortgage Brokers' Association annual conference last week.

For example, in the early 1950s, house prices rose dramatically above trend and took 10 to 15 years getting back towards trend.

"In the late 1970s, house prices fell in real terms, although you didn't notice because inflation was galloping."

House prices got to 20% below trend for a while and took 12 to 15 years to get back to trend, Gawith says.

House prices are currently 30% over-valued compared with the long-term trend, he says.

"The question you've got to ask yourselves is will they adjust to the long-term trend tomorrow. That's what The Economist magazine's been telling every country that will listen."

If house prices fall 5% next year, that's just a sixth of the gains above trend clawed back, he says.

Gawith attributes the boom to the fact that real floating rates have been extremely low as house prices were bolting.

"That suggests there's plenty of fuel sitting under the housing market. We think that will turn around as house price inflation cools and interest rates won't change much."

While debt-servicing costs are currently high, he expects that will ease over the next few years. The proportion of gross income needed to service a mortgage is 50% in some cases now with floating rate mortgages and slightly less for fixed rate mortgages, he says.

People are prepared to take the risk of such a high debt burden because they expect their incomes to rise.

That's probably true going forward, given that there will be tax cuts regardless of who has formed the next government and because the tight labour market makes it likely wages will rise, Gawith says.

With building costs rising about 8% a year and section prices rising about 22%, since prices of existing homes are rising about 13% a year, it's still cheaper to buy an existing home than to build a new one.

"That's why house prices continue to rise while building consents are dropping."

Gawith says the supply and demand position for housing is currently neutral but that the country is likely to be over-stocked in 2007 to 2009.

« Reserve Bank leaves rates unchangedFloating rates to remain up »

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Mortgage Rates Table

Full Rates Table | Compare Rates

Lender Flt 1yr 2yr 3yr
AIA - Back My Build ▼4.94 - - -
AIA - Go Home Loans ▼7.49 5.99 5.69 5.69
ANZ ▼7.39 ▼6.39 ▼6.19 ▼6.19
ANZ Blueprint to Build 7.39 - - -
ANZ Good Energy - - - 1.00
ANZ Special - ▼5.79 ▼5.59 ▼5.59
ASB Bank ▼7.39 5.99 5.69 5.69
ASB Better Homes Top Up - - - 1.00
Avanti Finance 8.40 - - -
Basecorp Finance 9.60 - - -
BNZ - Classic - 5.99 5.69 5.69
Lender Flt 1yr 2yr 3yr
BNZ - Mortgage One ▼7.54 - - -
BNZ - Rapid Repay ▼7.54 - - -
BNZ - Std ▼7.44 5.99 5.69 5.69
BNZ - TotalMoney ▼7.54 - - -
CFML 321 Loans 6.20 - - -
CFML Home Loans 6.45 - - -
CFML Prime Loans 8.25 - - -
CFML Standard Loans 9.20 - - -
China Construction Bank - 7.09 6.75 6.49
China Construction Bank Special - - - -
Co-operative Bank - First Home Special - ▼5.69 - -
Lender Flt 1yr 2yr 3yr
Co-operative Bank - Owner Occ ▼6.95 ▼5.79 ▼5.59 5.69
Co-operative Bank - Standard ▼6.95 ▼6.29 ▼6.09 6.19
Credit Union Auckland 7.70 - - -
First Credit Union Special - 6.40 6.10 -
First Credit Union Standard 8.50 7.00 6.70 -
Heartland Bank - Online ▼6.99 5.65 5.55 5.55
Heartland Bank - Reverse Mortgage - - - -
Heretaunga Building Society 8.60 ▼6.65 6.40 -
ICBC 7.49 5.99 5.65 5.59
Kainga Ora 8.39 7.05 6.59 6.49
Kainga Ora - First Home Buyer Special - - - -
Lender Flt 1yr 2yr 3yr
Kiwibank ▼7.25 6.89 6.59 6.49
Kiwibank - Offset ▼7.25 - - -
Kiwibank Special ▼7.25 5.99 5.69 5.69
Liberty 8.59 8.69 8.79 8.94
Nelson Building Society ▼7.94 5.95 6.09 -
Pepper Money Advantage 10.49 - - -
Pepper Money Easy 8.69 - - -
Pepper Money Essential 8.29 - - -
SBS Bank ▼7.49 6.95 6.29 6.29
SBS Bank Special - 6.15 5.69 5.69
SBS Construction lending for FHB - - - -
Lender Flt 1yr 2yr 3yr
SBS FirstHome Combo ▼4.94 5.15 - -
SBS FirstHome Combo - - - -
SBS Unwind reverse equity 9.75 - - -
TSB Bank ▼8.19 6.49 6.49 6.49
TSB Special ▼7.39 5.69 5.69 5.69
Unity 7.64 5.99 5.69 -
Unity First Home Buyer special - 5.49 - -
Wairarapa Building Society 8.10 6.05 5.79 -
Westpac ▼7.39 ▼6.39 ▼6.09 ▼6.19
Westpac Choices Everyday ▼7.49 - - -
Westpac Offset ▼7.39 - - -
Lender Flt 1yr 2yr 3yr
Westpac Special - ▼5.79 ▼5.49 ▼5.59
Median 7.49 5.99 5.79 5.69

Last updated: 29 November 2024 9:20am

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