Five more years of price rises
The Government’s top economists are warning that house prices are likely to keep rising ‘‘for some time’’, as the latest Treasury forecasts show a nightmare scenario of prices rising at about twice the rate as wages for the next five years.
Treasury’s Half Year Economic and Fiscal Update expects house prices to grow four times faster than wages next year, and five times faster than the economy as a whole, rising 8.5 per cent in just 12 months. Wages are expected to rise just 2.3 per cent over the same period.
Real Estate Institute of NZ data for last month showed that the national median house price reached a record high of $749,000, up 18.5 per cent from $632,000 in November 2019.
The Government, blindsided by the growth spurt, will spend the summer pondering what to do about the housing crisis. It has received policy advice from Treasury and the Reserve Bank, and is promising to announce changes to housing policy next year. This could include tax changes, and even a big Government building programme, Finance Minister Grant Robertson hinted during a Treasury update in Wellington yesterday.
The Treasury predictions come as ANZ, New Zealand’s largest bank and the holder of the largest slice of the national mortgage book, suggested that New Zealanders needed to accept that house prices should fall, or risk a painful economic correction in the future.
‘‘Political buy-in for a fundamental change within the housing market is needed. Allowing the market to function more freely would reap benefits, in aggregate and over time, even if some homeowners have to forego something now,’’ said the bank’s economists in its latest Property Focus report.
‘‘Not only would this help affordability, but a managed supplyinduced decline in house prices is a much better outcome than a painful correction, which is a risk under the current market structure.’’
But major changes appear off the table, for the time at least. Prime Minister Jacinda Ardern has previously said she wants ‘‘sustained moderation’’ of house prices, noting that Kiwis have an expectation that house
‘‘A managed supply-induced decline in house prices is a much better outcome than a painful correction.’’
prices will continue to rise.
Regardless of what the Government actually decides to do, its chief economic agency thinks the crisis won’t abate for some time. Its forecasters lay the blame for the crisis on almost every part of government: from migration to tax to planning.
The crux of the problem is that ‘‘population growth has outpaced growth in new dwellings over the past decade’’.
Treasury blames this problem on land use laws that make it difficult for the housing market to build enough houses to properly meet market demand.
‘‘Uncompetitive urban land markets constrain urban expansion, intensification, and therefore the pace at which new housing can be brought into the market,’’ Treasury said.
But it also acknowledged that savers were directed towards investment in housing. Although tax wasn’t mentioned by name, it
is widely accepted that preferential tax treatment has directed a wave of investment towards housing, pushing up prices.
‘‘When combined with periods of high population growth, there is an increased likelihood of growth in demand exceeding the pace of growth in supply, therefore raising prices.’’
It is widely expected that the Government will announce a change to the tax settings around housing next year.
There is some good news on the horizon, but it’s patchy. Building consents are up, although Treasury thinks that uncertainty and capital constraints due to labour shortages will see consent rates plateau next year. They are expected to recover by the end of 2022.
Any ‘‘sustained moderation’’ could be a long time away, as Treasury is warning that a ‘‘sustained period of high dwellings completion and/or reduced population growth (due to border restrictions) will be required to fully address the shortage built up in the past, and based on past experience, prices are likely to rise for some time’’.