House prices tipped to fall over the next three years

Infometrics was predicting an up to 13% price decline, albeit spread over the next three years. Photo / File

The effects of proposed restrictions on foreign buyers buying residential homes has thrown up plenty of uncertainties for economists, no less so for booming Queenstown and Dunedin, which of late have enjoyed a surge in house prices and values.

Although Queenstown Lakes district values had recently stalled, they were still over the $1 million mark and the most unaffordable in the country, and Dunedin had booked a more-than 12 per cent year-on-year gain, Quotable Value data revealed this week.

Infometric's economist Hilary Parker said Australians were exempt from the foreigner restrictions, but the buying of property by other nationalities had already slowed down.

"This was due to the retail banks' refusal to approve mortgage lending based on overseas incomes," she said.

Parker said the adjustments to the foreign buyer rules under the new Labour Government would "cement the housing market's downturn", but would not lead to significant, additional, house-price falls.

The number of house sales plunged 26 per cent to 5428 in September, the lowest level for that month in six years. The national median price rose by just 1.2 per cent.

Parker said the persistent slowing in price growth was also causing foreign buyers to lower their expectations of future capital gains, which was discouraging investment.

"We recently revised down our forecasts of house-price inflation and now expect prices to fall over the next three years as the market undergoes a correction," Parker said.

Infometrics was predicting an up-to 13 per cent price decline, albeit spread over the next three years.

ASB economist Kim Mundy said suggestions this week that about 3 per cent of house sales were to foreigners were an "unreliable estimate", given there was only limited data on non-residential market activity.

"While banning non-residents and non-citizens is likely to weigh on demand at the margin, it's very difficult to tell what the overall impact of the policy will be on the housing market," Mundy said.

Infometrics chief forecaster Gareth Kiernan said the strength of the Queenstown market appeared to be largely justified, given its strong population growth and booming tourism industry.

However, Queenstown was a relatively small market, so ran the risk of easily becoming oversupplied if economic conditions or population growth turned suddenly.

"At this stage the boom in Queenstown looks to have more substance than the boom last decade, but I wouldn't rule out the risks of price falls larger than the nationwide average if things turn sour," Kiernan said.

Given the significant presence of foreign buyers in Queenstown, the market might quickly lose momentum as the new government restrictions were enacted, he said.

Dunedin was more problematic than Queenstown because the economic fundamentals were less favourable in justifying the substantial lift in prices during the past two to three years.

"I would see bigger downside risks around the Dunedin market as the nationwide market slows."

Kiernan said price falls in Auckland might be smaller than the 10 per cent-13 per cent national average because of undersupply, which implied that other regions, such as Queenstown or Dunedin, could see price falls of more than that average, counterbalancing the smaller Auckland falls.

Infometrics had been forecasting a 5 per cent rebound in house prices next year, followed by an 8 per cent decline over 2019-20. However, because of the existing loan-to-value ratio restrictions, banks' tightening of credit lines and now the Government's foreign buyers' restriction, that forecast had been revised this week.

Kiernan was now picking a "gradual decline" in house prices of 10-13 per cent during the next three years, noting that after the global financial crisis of 2007-08, house prices had plunged 10 per cent in one year.

"This will be a more gradual decline. There won't be the mortgagee sales there were then," he said.