Home > Our Publications > New Zealand Outlook > 2004 > February

NEW ZEALAND's housing boom may be starting to slow down as higher interest rates, coupled with lower immigration start to reduce the demand for both new and established houses.
Deutsche Bank senior economist Darren Gibbs says the residential property boom may have peaked.
His comment came after Reserve Bank Governor Alan Bollard held the official cash rate (OCR) at 5 per cent. This allowed mortgage holders to breathe a little easier, but under the shadow of a tightening monetary policy.
But Dr Bollard has indicated an interest rate rise this year - and that will more than likely dampen the red-hot housing market, Mr Gibbs said.
Some banks have already lifted their interest rates.
Mr Gibbs said it is unlikely that OCR rises - leading to moves in fixed and floating interest rates - in the year ahead will seriously hurt those with mortgages.
"When property prices really skyrocket, real property-price deflation often follows soon after," Dr Bollard said.
The result would be a so-called "negative equity", when a house's value falls below the amount of the mortgage owed on it.
But Mr Gibbs said the New Zealand market does not look over-stretched compared with overseas markets.
"If the market gets ahead of itself, we'll go through a period of three or four years where nominal returns will stay pretty much unchanged, so that in real terms the prices are falling."
In other words, house prices will more or less stagnate and massive capital gains, which have characterised last year's boom, will dry up.
Infometrics principal, Gareth Morgan said that he believed there was a realistic prospect of prices falling in nominal terms.
One major driver of the housing boom has been net migration which, says ANZ Bank chief economist David Drage, is softening.
Annualised net migration reached 41,990 in May, its highest since August 2002, but had since fallen steadily to 38,310. "Over time, you'd expect that [softening net migration] to feed its way through into the property market," he said.
That would equate to a fall-off in demand for housing which, along with the comparatively low cost of mortgages, has helped the residential property market boom.
Real Estate Institute of New Zealand figures show a whopping increase in the median house price for November, up 20.5 percent for the year to $235,000.
Not surprisingly, an AMP study found that home affordability had worsened by 4.3 per cent.
And, as in Australia, rental yields have fallen.
ANZ Bank says rental yields have dropped from an average of 7 per cent in 1993 to about 5.75 per cent presently. Combined with likely interest rate rises, this could spell trouble for those whose mortgages are highly geared.
Christchurch-based mortgage broker Mike Pero said business had never been better with banks lending anywhere between 90 and 100 per cent.
In some centres, buyers could get a $300,000 mortgage without a deposit.
But how sensitive to interest rate hikes are those with mortgages? Household debt was now more than 130 per cent of an average household's annual disposable income, from about 65 per cent in 1991 as lower interest rates meant people could better service debt.
"The debt servicing costs are currently around their average level for the last 10 years, even though that stock of debt has increased quite markedly," Mr Drage said.
"Overwhelmingly, household debt is dominated by housing or mortgage-type debt," he says, adding that the total value of mortgages was increasing by about 16 per cent a year.
As Bank of New Zealand head of market economics Stephen Toplis commented, "property booms don't last forever.
"We think there is a very real risk that the combined influence of current strong supply growth, rising interest rates, the soaring New Zealand dollar and a reduction in net. immigration may soon take the heat out of this sector."