House affordability falls says report

12.00pm

Rising prices have made houses less affordable according to one report today while another predicts prices will fall later this year with the prospect of a "nasty" correction in some areas.

Affordability to buy a house dropped almost 6 per cent in the quarter ending December, according to the latest AMP Home Affordability Report.

For the year the index declined by 7.6 per cent.

A slight fall in interest rates was more than offset by the rise in house prices, which rose 20.5 per cent in 2003.

The national median dwelling price rose 9.3 per cent in the quarter to an all-time high of $235,000 with all 11 regions up.

AMP Financial Services managing director Ross Kent noted that recent anecdotal evidence of a slowdown in sales was unsupported by figures from the Real Estate Institute. Quarterly dwelling sales reached a record high of 32,332, 18.8 per cent up on the same period last year.

A fall in interest rates for the fifth consecutive quarter continued as the main driver in sustaining strong market activity.

Mr Kent said the record sales and prices "provides evidence that New Zealander's love affair with residential property has continued unabated".

"However, there are plenty of warning signs that the current housing boom will soon end as interest rates may rise, new housing stock meets demand and net immigration growth slows.

"There are also signs that rental yields are beginning to slip. As with any investment, people should understand their risk profile and be wary of exposing themselves to a situation where borrowings outstrip their ability to repay," Mr Kent said.

Those comments were backed by independent economics firm Infometrics which said real estate agents and potential property buyers were in danger of overestimating the ongoing strength of housing market.

Increasing prices over the last year was fuelling expectations of further strong capital gains over 2004 but the factors pushing up prices over 2003 will not be as potent this year, Infometrics economist Andrew Gawith said.

He noted population growth, a fundamental driver of demand for new housing, was slowing sharply as the net inflow of migrants evaporates.

Over the six months to November, the net rate of arrivals had plunged from 3650 per month to 1020 (seasonally adjusted).

"That is sufficient to reduce population growth by one-third."

Infometrics expects mortgage rates to rise this year as the Reserve Bank hikes the cash rate to restrain inflation pressure, primarily emanating from the building industry.

Consumer Price Index figures yesterday showed that the cost of building a new house rose 3.3 per cent in the December quarter and 8.5 per cent over the year.

"Higher rates will squeeze some buyers out of the market," Mr Gawith said.

As well, supply of new housing was at a historical high.

The number of new dwelling consents over the last 12 months was almost 30,000, a 26-year high.

"Such a rapid rate of building in the face of slowing demand is a recipe for an oversupplied housing market and, consequently, falling house prices."

While house prices are likely to climb further over the next six months, Infometrics predicts that property values will begin to fall before the end of this year.

"While price falls may not be significant nationwide, some areas that have experienced large price increases (such as Nelson) could undergo a nasty correction," Mr Gawith predicted.

Otago recorded the steepest quarterly decline in home affordability with a 13.4 per cent fall, followed by Wellington (12), Canterbury/Westland (10), Taranaki (7.3), Southland (5.9), Newson/Marlborough (5), Hawke's Bay (5), Manawatu/Wanganui (4.1) and Waikato/Bay of Plenty/Gisborne (1.1).

Affordability actually improved 1.6 per cent in the key Auckland region, as it did in Northland (1.3).

Over the year, affordability decline most in the South Island. In Nelson/Marlborough it declined 36.5 per cent, followed by Southland (21.6) and Otago (17.9).

In Auckland, affordability declined only 2 per cent for the year while in Wellington the fall was 3.5 per cent and Canterbury/Westland it was 8.5 per cent.

- NZPA