The year is almost over and these are the main things which have happened in the residential housing market:
1. House prices stopped falling in the middle of the year and are so far 6.7% off their lows in Auckland and Wellington and 4.6% in Canterbury.
2. First home buyers jumped into the market in good numbers in February and have remained active since, eventually accounting for a record percentage of total house sales.
3. Investors have been showing increased interest in recent months, more latterly encouraged by the coming restoration of interest expense deductibility. But they remain hesitant as costs are high and for many the numbers don’t yet stack up.
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4. Tenants are facing increasing competition for accommodation courtesy partly of the record net migration boom adding 2.5% to our population the past year, and the active discouragement to people to provide rental accommodation caused by the previous government’s policies.
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5. Wholesale interest rates rose to higher-than-expected levels two months ago but since then have been falling – mainly in response to falling rates in the United States amidst high confidence that their inflation genie is almost back in the bottle. Sufficient confirmation of the approach of sub-3% inflation in New Zealand is not yet present and our central bank is unlikely to bring forward its mid-2025 timing for policy easing until maybe April.
What is my current best guess for what lies ahead for 2024?
There will be restraint on the speed with which house prices rise from increasing unemployment. But that’s about it on the negative side. On the price-boosting side we will have these factors in play:
Tony Alexander: increasing unemployment will restrain the speed of price growth, but other factors will boost house prices. Photo / Fiona Goodall
1. Rising expectations that interest rates will soon fall (bank margins are so wide currently they could shave 0.75% off one-year fixed rates and still be earning above average margins). Light at the end of the tunnel will bring more buyers into the market well before the official cash rate is in fact cut from 5.5%.
2. Still strong net migration inflows even allowing for some easing through the year. Demand for accommodation will continue to increase.
3. Decreasing production of new houses. That is – reduced growth in house supply at a time of increasing housing demand.
4. Tax changes for investors will have the opposite effect of what happened in March 2021 when the removal of interest expense deductibility started. More investors will look to make a purchase.
It is not possible to know when the pace of increase in average house prices will accelerate from the average 0.8% a month gain seen since June. But my monthly surveys of real estate agents, mortgage brokers, investors, and consumers should provide some early insight.
My current pick for price gains in 2024 is the same as it has been since just before the middle of this year. About 10%. For 2025 there will be extra momentum in the housing market, FOMO is likely to be much higher, and I’d expect gains nationwide averaging closer to 15% then than 10%.
Merry Christmas everyone and here’s hoping the government can speedily enough implement policy changes that house construction will be able to stage a good recovery from early in 2025. Developers are already buying land in anticipation of higher construction the year after next.
- Tony Alexander is an independent economics commentator. Additional commentary from him can be found at www.tonyalexander.nz
