Peter Thompson Managing Director Barfoot & Thompson 3 Mar 2021

There is little likelihood of an early change to current housing market conditions with most economists agreeing that prices will continue to rise.

However, there is some disagreement about what is in store for prices in the second half of the year.

Westpac Chief Economist Dominick Stephens, in a REDnews article in late February, is quoted as saying house prices are “still set to boom” and forecasting a 17% price increase in 2021.

In its February Monetary Policy Statement, the Reserve Bank is also forecasting further house price increases but “assumes” prices will “dampen” from the June 2021 quarter.

In creates a somewhat confusing picture for those of us involved in the buying and selling of property but only look at the headlines and summaries of economic predictions as we try to gauge just where the market is going.

I’m not being critical of the professional capabilities or expertise of those economists making the forecasts. I’m sure each set of economists could argue their corner convincingly with facts and data to back up their conclusions.

But it does raise the question: Who do we believe?

In such circumstances, my position is to go back to basics.

When buying a house, whether as an owner-occupier or investor, your time horizon should be medium to long term.

The Real Estate Institute say that the average length of time people stay in a home is 7 years, and that seems to me a reasonable definition of medium to long term.

If you are faced with doubts about whether you might be paying too much for a house, ask yourself the question: What is the sale price likely to be in 7 years?

It’s a question no one can answer precisely. However, what you can do is see what has happened to prices over the previous 7-year period.

In the past 50 plus years, records show that house prices in dollar terms (not adjusted for inflation) have not gone backwards over such a timeframe.

There may be years when prices might have retreated or marked time, but values over any 7-year time period have increased.

The real issue is not today’s price. It’s the ability to sustain mortgage repayments over the medium term, and that in turn is reliant on income stability and managing any increases in mortgage interest rates.

In terms of employment and mortgage interest levels, Westpac and The Reserve Bank are in broad alignment. They see little change to present levels in the short term.

For me, the most consistent themes around the factors affecting house prices are

  • the country’s housing stock is too low to house our population, and there is no quick fix as houses take time to build. The Government is committed to changing the Resource Management Act – which will contribute to a resolution. But changing such complex Acts, and then allowing for the time lag for changes to occur, is likely many years out in the future, and
  • current low mortgage interest rates allow borrowers to take out large mortgages, and therefore pay more for a home. All indications are that mortgage interest rates will remain low for some time yet.

As a buyer in the current competitive market, the options are stark.

If you want to buy a home, you need to outbid competitors. In the current market if you have the financial capability, you will be inclined to push yourself to your limits, as opposed to your self-imposed cap. You are likely to do this because you know if you don’t succeed, you’ll face the same competitive pressure at the next auction.

It creates a catch 22 situation which leads to prices rising. At present, the current market situation has yet to run its course.