Economists expect house price inflation to fall to near zero
House prices continue to soar in New Zealand, leaving the government desperate to curtail them by introducing new initiatives, according to BNZ economists, led by BNZ head of research Stephen Toplis.
BNZ’s latest Economy Watch report states that current house inflation has been driven by a combination of extremely low interest rates, relatively poor-perceived returns on other asset classes, speculative fervour, and the fear of missing out (FOMO).
Now, the government has run out of patience and decided to launch a full attack on prices through new initiatives, such as the housing package, said BNZ economists.
Toplis said whether or not the new housing package has a desired impact or not is “neither here nor there.”
“The fact of the matter is the government will do what it takes. If this set of policies fails, then more will be introduced until such time that house price inflation abates (or even prices fall). The government is, in large part, staking its credibility on this and cannot be seen to fail,” he said.
Toplis believes the government would remain unhappy unless house price growth falls below income growth. As a result, BNZ economists expect house price inflation to fall to near zero, at best, in the not too distant future.
However, Toplis warned that “no government, or central bank for that matter, has ever been able to fine tune an asset market, so the balance of risk is that a decent correction in prices occurs.”
“For all but new purchasers, this matters little as it will simply reverse some of the exceptional capital gain we have seen over the recent past,” he continued.
“The possibility of a substantial correction is multiplied if we are right with our potential oversupply diagnosis and if the recently announced measures have a substantial negative impact on sentiment. House prices would come under significant pressure if everyone headed for the exit at the same time.
“Returns to investors fall. Many have been investing purely for the purposes of capital gain. That capital gain will now be reduced to the extent the bright-line test might apply, and the net cost of providing accommodation will rise given the reduced deductibility of interest rate costs. All other things being equal, this will initially push up rents and/or reduce the supply of rental accommodation.”
