ANALYSIS: My guide for house prices in New Zealand is the House Price Index from the Real Estate Institute of New Zealand with research input from the Reserve Bank. It shows that house prices in New Zealand have risen on average 7.2% a year since 1992, with Auckland prices rising 8.2% a year.
Over the past year, house prices have fallen 1.5% nationwide and 2.3% in Auckland. These declines have taken prices back to where they were two years ago (and four years ago just after the pandemic surge). Compared with five years ago, nationwide prices are up 24% and Auckland prices are up 15% – that equates to just under 5% a year for New Zealand and 3% a year for Auckland.
Why is Auckland’s growth rate behind the rest of the country? The sub-par performance is most likely the result of the Unitary Plan increasing supply and a shift to the regions by the city’s ageing population and those wishing to escape the pandemic.
I do not believe house prices will grow 7% a year but will instead rise between 5% and 6%. Where will the new restraint come from?
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One cause will be greater growth in house supply courtesy of recent rule changes along with extra efforts being made by the government to speed up the consenting process. It is worth nothing that on average over the past half a century the number of dwelling consents issued around the country each year has equalled 0.62% of the population.
The ratio has tended to be at its lowest points during and after a recession. For instance, this number hit just 0.31% in 2011 just after the GFC. But over the past year consent issuance equates to 0.64% of our population. That is, despite the recession, the woe, high interest rates, anti-investor rules, and a credit crunch from late-2021, consents have only fallen to average levels.
It seems reasonable to expect that from early-2026 and maybe later this year consents will track firmly up again in response to first lower interest rates, then better employment prospects, and then third the incentive to build as people hit the new debt-to-income (DTI) lending limits.
Independent economist Tony Alexander: "It does not seem reasonable to expect that interest rates will return to post-GFC levels." Photo / Fiona Goodall
Another source of restraint on average house price growth going forward will be the selling of investment properties by Baby Boomers and Generation X in order to fund retirements, which courtesy of soaring household costs are proving to be a lot more expensive than expected. This factor will also contribute to a new flow of retirees to regional towns with good hospital facilities.
A third source of price restraint will be reduced buying from investors because of the hike in home ownership costs, ring-fencing of losses from other income for tax purposes, and legislation placing new requirements on landlords.
Also, barring an unpredictable shock, it does not seem reasonable to expect that interest rates will return to post-GFC levels when inflation rates came in lower than expected and eventually concerns soared about deflation.
I consider the most substantial of these factors to be the stronger outlook for house supply growth. However, as efforts are made to further promote construction it pays to remember that while increased supply can constrain prices it will only drive them lower if construction costs fall away or massive land areas are made available with centrally-funded infrastructure. That seems an extremely unlikely scenario and instead the upward march of the costs of putting a dwelling up will be one key factor causing house prices to keep rising on average.
By how much a year on average? I’d say that from an average gain of 7.2% a year from 32 years ago, the average gain out to 2057 will be closer to 6%. Remind me to discuss how that forecast went when that year comes around.
- Tony Alexander is an independent economics commentator. Additional commentary from him can be found at www.tonyalexander.nz
