Budget 2021: Government expecting 'very sharp' drop in house price growth

The Government is forecasting a significant slowing in house price growth in the coming years, after the New Zealand market's recent red-hot run.

"This is a very sharp adjustment in house prices but a very necessary one," Finance Minister Grant Robertson said in today's Budget lockup.

Treasury has warned the decrease in expected house price growth will "dampen the economic recovery".

But Robertson did not appear worried about this warning.

"We do need to move away from [house price growth] as the engine for growth in New Zealand."

The Government also announced an extra $730 million for Māori housing schemes in the Budget today.

In the lockup, Robertson attributes the expected slowing in house price growth to: The Government's recent housing package announcement, and the Reserve Bank's moves on loan-to-value (LVR) ratios.

In the Budget, the Treasury released its house price growth expectations over the next four years.

It shows the annual change in house prices between 2020 and 2021 was 17.3 per cent – an increase that has tipped medium house prices in some areas of the country above $1 million.

But that number is expected to moderate significantly over the coming years.

The Treasury is expecting house price growth between 2021 and 2022 to be 0.9 per cent.

It jumps slightly to 2.1 per cent the next year, 2.1 per cent the year after that, and 2.5 per cent between 2024 and 2025.

"As the borders reopen, higher population growth and continued low interest rates are expected to result in a gradual increase in house price inflation," Treasury documents say.

"The slower pace of house price growth means house prices end up at around 4 per cent lower in June 2025 than forecast in the Half Year Update."

The Treasury documents add that house prices are expected to be roughly 16 per cent lower than they would have been in 2025, if the Government had not implemented a range of housing announcements this year.

Those policies included a $3.8 billion housing infrastructure, an extension of the bright-line test and the scrapping of the interest deductibility programme.

But Budget documents show that the slower level of house price growth is expected to "dampen economic recovery".

"House price movements have a broader impact on the economy," Budget documents say.

This is because as the value of people's houses go up, they are more likely to spend more money – stimulating the economy.

"Slower house price growth will likely dampen these effects, resulting in a slower economic recovery than otherwise."

But the forecasts come with a warning to the Government: "The impact of tax changes on house prices and the associated effects on the wider economy are uncertain and present significant risks to the economic forecasts".

Asked about this warning, Robertson said New Zealand needs to transition towards "more productive growth".

The Government also announced today that it would spend close to $730m on Māori housing initiatives.

This is split up into $380m of new money to build up to 1000 Maori homes and for a significant Māori home redevelopment programme.

The rest is some $350m of the previously announced $3.8b Housing Acceleration Fund has been ring-fenced to help enable the construction of even more homes for Māori.