New Zealand's rampant house price inflation could be slowing, the Treasury says.
The Treasury is also predicting a boom in the residential housing sector, although it is reiterating warnings about the impact of forecast interest rate increases on indebted households.
The Government's half-year economic and fiscal update was released today, and after a period of skyrocketing house prices, the Treasury is predicting price inflation will peak this quarter at 10 per cent before moderating to about 2.4 per cent towards the end of the four-year forecast period.
Finance Minister Bill English said "there's a few reasons to think we might have" reached a peak.
This was partly because of a "rapidly growing" understanding that interest rates were going up.
"I think that's got hold in the market in the last couple of months," he said.
There was also a growing awareness of efforts to increase supply such as through the special housing accords that had been established in Auckland. They will be expanded to other centres and will see more houses built than previously.
"There is momentum building around the supply-side measures, and a third [reason], I think, is people just thinking at 15 per cent a year. It can't go on forever; it's going to stop somewhere," English said.
The Government has identified supply constraints as one of the main drivers of house price inflation.
The Treasury predicts strong growth in residential development across the country.
It said that after a soft patch in the middle of the year, a surge in building consents in Canterbury in the September quarter "suggests that residential rebuild activity is going to increase significantly".
"Annual real residential investment growth is forecast to accelerate to a peak of around 26 per cent in the March 2015 year," it said.
More than two-thirds of the Christchurch rebuild was expected to be finished by the end of 2018.
Residential investment activity in the rest of the country was expected to rise "significantly", especially in the Auckland region.
"The drivers of underlying growth include a catch-up for past population growth, expected future population increases, including through migration, rising household investment income, and low, albeit rising, interest rates," the Treasury said.
Residential investment was forecast to peak at about 6 per cent of real gross domestic product, in line with the share reached in the early 2000s.
Rising house prices were expected to see more houses built, although the new lending restrictions had made it less predictable.
"The implementation of LVR [loan-to-value ration] lending restrictions by the Reserve Bank makes it less certain how the supply and demand dynamics in the housing market will play out," the Treasury said.
Higher than expected net migration, with the net inflow reaching a three-year-high of 17,500 in the year ended October 2013, was also expected to contribute to price inflation, although that was offset by the LVR restrictions, which were expected to impose a "modest dampening effect".
The report reiterated predictions that interest rates were likely to rise in the short-term, with the growing economy likely to force the Reserve Bank to raise the official cash rate in the first half of next year.
- Fairfax Media