Home > Our Publications > New Zealand Outlook > 2001 > September

By Rozanna Wozniak
Senior Economist, ASB Bank Auckland

HOME loan interest rates in New Zealand could start to rise as housing confidence has continued to climb, bucking the weakening trend of many other confidence surveys.
A net 49 per cent of respondents thought is was a good time to buy a home, up strongly from a net 37 per cent the previous quarter.
This optimism has been translated into hopes for only a modest increase in house prices. The level of house price expectations, although positive, remains well below the level of general housing confidence, according to the bank's housing survey.
In addition, both measures (housing confidence and house price expectations) remain well below the highs seen in late 1998/early 1999 when real estate turnover enjoyed a sharp but unsustainable surge.
Falls in interest rates and reports in the media of an improvement in real estate turnover have underpinned the improvement in confidence. This has helped dampen any concerns that house prices may still have further to fall.
The reasons for optimism have remained largely unchanged - in most places, houses appear cheap relative to the highs of the mid-90s, interest rates are favourable and there are still bargains to be negotiated.
Of those respondents who thought it was a good time to buy, 51 per cent cited favourable house prices as a reason and 24 per cent cited a buyers' market, largely unchanged from the previous survey. 34 per cent cited favourable interest rates, up from 24 per cent previously.
A net 22 per cent of respondents were expecting house prices to rise, up from a net 17 per cent previously. House price expectations continued to be in the highest in Wellington, reflecting the strength of the regional housing market during recent years.
Several factors are worth noting:
¥ A large number of respondents (almost half) simply expect house prices to remain unchanged.
¥ The net level of house price expectations remains well below the levels seen during the mid-90s, when it reached a high of 45 per cent.
Even over the long term, only modest gains are likely and this suggest that the benefits of owning your own home have reduced significantly since the days of high inflation and that renting has increasingly become an option worth considering.
However the decision to own is not just a financial and economic one. New Zealanders will always shave a strong desire to own.
With the cycle in interest rate cuts now believed to be coming to an end, interest rate expectations are expected to increase during coming months.
Auckland has remained soft, with house prices edging down in all cities except Auckland City itself, which recorded a rise of 0.5 per cent. Manukau and Waitakere and Cities recorded small falls of 0.3-0.4 per cent, North Shore City had a fall of 1 per cent, and Papakura 1.7 per cent.
For the year as a whole all recorded a fall, ranging from 1.2 per cent in Auckland City to 3.1 per cent in Waitakere City. Auckland City has therefore continued to perform better than the rest of the region.
Upper Hutt, Lower Hutt, and Wellington Cities recorded gains for the quarter of 1.6 per cent, 0.4 per cent and 0.3 per cent respectively, but Porirua recorded a fall of 1.4 per cent.
The biggest issue for New Zealand's population growth continues to be migration. The number of immigrants has been edging higher for some time, but emigration has more than kept pace. Nevertheless, the negative impact of emigration on housing activity should slowly reduce as immigration responds to policy changes.
While floating mortgage rates and short term fixed rates declined, long term fixed mortgage rates have started to edge higher and there is a general believe within financial markets that rises in long term bond rates (and therefor recent rises in long term fixed Mortgage rates) will be sustained.
The next six months is expected to bring more of the same. Long term fixed rates are expected to continue to edge higher. Floating mortgage rates could decline slightly if the Reserve Bank delivers another small cut to the Official Cash Rate (OCR).
However this is by no means certain, and even less certain for short term fixed rates. In fact, it is possible that the lowest in mortgage rates have already been reached.