Westpac’s chief economist Dominick Stephens would like to shift the conversation on rising house prices away from old school talk of supply and demand.
Instead, he says, look around at your use of all sorts of new technologies over the past ten years.
“I’ve been quoted on the link between on-line shopping and house prices going up,” says Stephens. “But while that’s one technology change, it’s not the be-all and end-all of what’s driving low inflation and low interest rates.”
“It has stunned economists for the past decade who’d expected that with a given level of economic growth and interest rates lower, then you’d see slow inflation. But in all asset classes around the world, including houses, prices have gone up.”
Start your property search
The answer is something that classical economics hasn’t encountered before: technologies that are driving down the costs. It’s not just on-line shopping putting the squeeze on retailers’ margins. Stephens points to Uber challenging taxi fares, or Uber Eats challenging traditional takeaways, Netflix being so much cheaper than old Sky TV, even getting free maps from Google instead of paying for them.
“Technology has suppressed inflation. The new technologies have delivered cheaper goods in really surprising ways for a long time, so while the economy might be down, there’s still low inflation and low interest rates.”
Stephens expects this won’t change soon, predicting another drop in the Official Cash Rate from 1.5 percent to 1 percent, but that mortgage rates won’t have as much of a matching drop. What he does see is the combination of low interests and removal of the threat of capital gains tax sparking around 18 months of house price growth.
“Nationwide prices have grown two percent; our forecast for the coming year is that will go to seven percent, which we haven’t seen since March 2017.
He says that the nine percent growth for the rest of the country, excluding Auckland and Canterbury, was unsustainable.
Auckland will lag the rest of the country. Its prices have been falling by about four percent per annum, but Stephens predicts that will go back to zero by the end of the year, then rise five percent next year.
But don’t get too excited. Stephens predicts this stronger growth will end when interest rates rise, which eventually they will.
“But that’s a long way off. Some time in the 2020s we expect mortgage rates will rise and house prices will fall.”
