“Sharp rise” in house prices in early 2019 - Westpac economists

 “Sharp rise” in house prices in early 2019 - Westpac economists

Westpac economists are predicting a “sharp rise” in house prices in early 2019 on the back of the Reserve Bank’s signals on interest rates.

Westpac Chief Economist Dominick Stephens, writing in the latest Home Truths housing newsletter, said his team had predicted a drop in house prices over 2018 and a modest increase in 2019.

But that forecast was made before the Reserved Bank signalling last week that it was close to dropping interest rates.

“The game has now changed,” said Stephens. “We are now forecasting essentially flat prices over the remainder of 2018, followed by a sharp, but short-lived, rise in prices for early 2019.”

Stephens said financial markets had reacted to the Reserve Bank announcement by slashing wholesale fixed interest rates.

“That could cause a drop in two-year fixed mortgage rates of around a fifth of a percentage point over the coming few months. A drop in mortgage rates of that magnitude, if it comes to pass, will have a powerful effect on the housing market.”

Further in favour of house price rises, the Reserve Bank has also indicated that it was considering loosening LVR restrictions.

July data from the Real Estate Institute of New Zealand  showed that nationally house prices were up 4.9% year-on-year. Auckland had the weakest growth at 1.6% but Gisborne/Hawke’s Bay, Southland and Manawatu-Wanganui had double-digit percentage increases (14.6%, 13.1% and 12.3% respectively).

Stephens said the housing market outlook was now “a battle between two powerful opposing forces – Government policies that will cool the market versus Reserve Bank policy that will boost it”.

“Our best forecast at this point is that nationwide average house prices will remain fairly subdued over the remainder of 2018. Within that average we would expect Auckland prices to fall while prices in most other regions rise slowly. That is because the foreign buyer ban will affect Auckland more. But for early 2019, we are now pencilling in a vigorous first quarter with a 1.5% house price increase nationwide. By that time we would expect lower mortgage rates, looser LVR limits and an improving economy to be providing a positive counterweight to the foreign buyer ban and tax changes.”

Stephens cautioned that his team’s long-term forecast for house prices remained negative.

“The Reserve Bank won’t be able to hold interest rates down forever. We expect mortgage rates will rise in the 2020s, and when that happens house prices will take a hit. We are forecasting a house price decline of almost 3% for 2020.”

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