House prices tipped to climb as home building falls

By JAMES WEIR The Dominion Post | Monday, 8 Feb 2010

Home building is forecast to pick up in the next couple of years, but still be at least 10,000 a year short of expected demand, so house prices are likely to keep rising, according to an industry forecast.

In the year to March 2011, industry analyst BIS Shrapnel expected house prices to rise between 5 per cent and 8 per cent.

While prices would keep rising, it would not be as strongly as in recent months, held back by the impact of further rises in mortgage interest rates, making homes less affordable for buyers, BIS said. Latest figures from QV showed house prices were up 4.4 per cent from last January, but still more than 4 per cent below the peak of the market in 2007.

BIS Shrapnel said there had been a 27 per cent increase in house building consents in the December quarter compared with a year before, rebounding from a two-decade low in consent numbers.

The slump in home building in the past two years meant the housing market would be short of new homes. "For the next two years we don't see enough supply to meet demand," said Adeline Wong of BIS.

Between 17,300 and 18,600 homes a year would be built in the coming two years.

"This in no way meets our estimated underlying demand for housing, which will average 29,000 units a year over two years."

The recovery in building was expected to continue in coming years, driven by that shortfall in new homes, especially because of relatively strong migration,

The level of activity would peak at a lower level of activity compared with the last peak in 2004.

House prices were expected to keep rising because of the shortage of supply in the short term, especially as the economy improved, but mortgage rates would also rise.

BIS forecasts that the Reserve Bank's official cash rate will rise by 1 percentage point in the coming year to March, with average fixed-term mortgage rates rising to about 8.5 per cent by March 2012.

Consumer confidence was expected to gradually pick up as economic growth improved, with home buyers' confidence boosted by wages and jobs growth.

Figures last week showed unemployment rising to 7.3 per cent in the December quarter, the highest rate for a decade, and up from 6.5 per cent in the September quarter.

But Ms Wong expected the economy to improve in the second half of the year and jobs numbers to lift.