Allure of renting set to rise

As interest rates continue to rise, house prices may fall in the next couple of years, according to a report by Westpac Bank.

And as interest rates rise, the picture will tip in favour of renting, rather than buying, Westpac says.

"Renting or buying is roughly in balance (now)," Westpac chief economist Dominick Stephens said.

Last year when interest rates were low, it was seen as much better to buy a home than rent.

"When mortgage rates have gone up another 1 per cent or so, the decision may well favour renting," Stephens said.

Asked if it was better to hold off buying now when house prices might fall, he said: "I'd be cautious". Interest rates were likely to rise and it would be a good idea to fix borrowing costs, but there were still opportunities to invest in property.

Floating mortgage rates are heading towards 8 per cent and fixed term rates to about 7 per cent and may stay up for an extended period as the Reserve Bank tries to tame inflation, especially in the construction sector.

Stephens said the housing market was sensitive to interest rates changes, so a recent revival in the housing market would be "short lived".

Fixed mortgage rates had risen sharply in the past few weeks, with two-year fixed rates now about 6.4 per cent.

Floating mortgage rates are now about 6.45 per cent and were likely heading to 8 per cent in 2016.

"It gets to a point where the rent or buy decision turns in favour of renting," he said.

When house prices and interest rates were both rising, buying a home could only be justified assuming further capital gains continued.

"The boiling point comes when the expectation of further capital gains suddenly evaporates and you are left with the naked fundamentals of mortgage interest versus rent," Stephens said. Without rising house prices, buying a home did not stack up financially, and then house prices tended to fall "modestly", he said.

"We would not be surprised to see a period of declining house prices during the middle part of this decade," Stephens said.

While Westpac is picking a fall of about 2 per cent a year for a couple of years, Stephens said the market could actually drop sharply, but it was hard to pick the timing.

NZIER principal economist Shamubeel Eaqub says he has favoured renting instead of buying in Wellington and would stick to that when he moves to Auckland later in the year.

Renting was a better option in areas like central Auckland where prices were high and rental yields were as low as 2 per cent or 3 per cent.

But in other regions such as Taranaki, rental yields were around 6.5 per cent and so buying a home may be a better option.

In places like Auckland, if people were buying for purely financial reasons, they were effectively factoring in high house price growth forever.

"Those capital gain expectations may not be realistic, because they are far higher than we have observed in the past 20 to 100 years," he said.

Fairfax Media