House prices set to fall by 10pc - study

By ANNE GIBSON

An in-depth economic study has forecast a 10 per cent drop in real house prices, which "will wipe the grin off many smug homeowners' faces and make real estate agents a little less arrogant".

So says a housing and rental analysis from First NZ Capital's economics and strategy director, Jason Wong, who predicts a gradual turnaround in housing's fortunes in the next five years.

Slowing net migration, weaker economic growth and less rampant house building will combine to dampen escalating house prices, which began their latest surge in 2000, Wong wrote in his June 12 strategy paper.

"Peak to trough, the fall in real house prices may be in the order of just under 10 per cent," Wong wrote.

Yesterday he said: "The key message is we're not in a housing bubble, but house prices have got ahead of themselves in terms of rents and incomes."

But even a gradual decline will not do much harm except to quell spending somewhat.

Wong is concerned about the ratio between house prices and rents, which he says needs to be brought back into line.

"The level of this ratio is at a record high, reflecting house prices far outpacing rents since mid-2001. With steady rents, house prices would have to fall 16 per cent to bring the ratio back down to the average over 1975 to last year," he wrote.

His study was in response to an article in the Economist which concluded that house prices in many countries were at a bubble phase, particularly in Ireland and Britain.

The Economist predicted a 30 per cent fall in some countries during the next few years, but Wong said conditions were not entirely similar here.

Real house price inflation in New Zealand has been lower than the global average over the past seven years and well below the bubble-prone countries cited by the Economist.

Last year, nominal house price rises put New Zealand fourth in the world, Wong found.

Britain was first with prices up 24 per cent, Australian houses rose 18 per cent, Spain was up 17 per cent and New Zealand was up 11 per cent.

But last year was a spectacular one for house price rises here and over a longer term NZ scored much lower on another chart.

Based on information from First NZ Capital, the Economist and Quotable Value, Wong found New Zealand scored 11th on a chart of 15 countries for real - as opposed to nominal - house price rises between 1995 and last year.

Ireland had the highest price rise, at 152 per cent, followed by Britain, which was up 89 per cent.

Prices in the Netherlands were up 83 per cent, Spain 58 per cent, Sweden 56 per cent, Australia 53 per cent, Belgium 39 per cent, France 31 per cent, the United States 27 per cent, Europe 19 per cent, New Zealand 12 per cent, Italy 8 per cent, Canada 2 per cent, Germany 13 per cent and Japan 19 per cent.

Wong is also worried about the ratio here between house prices and incomes.

"The house price to disposable income ratio is high, but lower than that reached in the mid-1990s. On this measure, house prices would need to fall 13 per cent to bring the ratio down to average. They're probably falling already, but the statistics lag a bit.

"They're probably falling already, but the statistics lag a bit," he said.

"Between 1972 and 1974 we had a particularly vicious housing bubble due to house prices rising around 60 per cent.

"Those gains were all wiped out during the next five years."

Figures released last week from Barfoot & Thompson showed Auckland house prices fell between April and May, but director Peter Thompson explained this by saying that April was a particularly buoyant month and an aberration.