Rapid house price rises 'unsustainable'

JAZIAL CROSSLEY
Last updated 11:56 27/03/2012
house property real estate
COOL DOWN: The current rapid rise in house prices is expected to be temporary.

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The rapid rises in house prices in the Auckland and Christchurch markets are unsustainable, says Westpac.

The bank released a report on the housing market today saying increasing values in those areas were due to a shortage of homes and that the rest of the country was unlikely to see such large rises.

"We expect higher interest rates and a burst of construction activity to curtail the market in years to come," Westpac chief economist Dominick Stephens said. 

Nationally, house prices were up 4.3 per cent last year according to the Real Estate Institute.

Stephens expected house prices to rise a further 5 per cent overall this year, then stay flat in 2013 before falling 1 per cent in each of the following two years.

"Our fear is that prices could rise more than 5 per cent this year, particularly if the Reserve Bank dallies on hiking the official cash rate. And we do use the word 'fear', because the further prices rise in the short run, the further there could be to fall over a longer horizon," Stephens said.

He warned homeowners not to get too excited about rising prices because he expected the current burst of house price inflation to be temporary.

"Interest rates will not stay this low forever.

"We expect rates to rise substantially over the 2013 to 2015 period, as the Reserve Bank struggles to contain inflationary pressures arising from the Canterbury rebuild. Higher interest rates would put the brakes on the housing market in short order," Stephens said.

"And second, house prices in New Zealand remain stretched relative to incomes."

While the Auckland and Christchurch markets showed a large lift in property values, prices fell in most other areas with a pick up seen only towards the end of the year.

"Our analysis suggests that prices have been rising more quickly in Canterbury and Auckland because both regions are experiencing local housing shortages  ...  other regions will not necessarily follow where Auckland and Canterbury have led," Stephens said.

Auckland was the only area facing significant under-building relative to population growth, with any more than 2.5 new people to an area for every house consented considered to be a shortage.

In the three years to June 2011, Auckland's population grew by seven for people for each new consent issued while Wellington faced a smaller scale shortage as the population rose by 3.5 people for each new dwelling consented.

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- BusinessDay.co.nz

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