Glimmer of hope shines on housing market

Price expectations in the New Zealand housing market have continued their downward slide, according to the latest ASB Housing Confidence Survey.

More people are expecting house prices to decline further
The quarterly survey for the three months ending July 2008 shows a net 55% of respondents now anticipate lower house prices, compared to a net 34% in the previous quarter.

“This result is by far the most extreme reading since the inception of the ASB Housing Confidence Survey in 1996, reflecting expectations that a weaker housing market will continue for the rest of 2008,” says Nick Tuffley, Chief Economist, ASB.

“House sales turnover volumes have been most affected by this sentiment, largely as a result of vendor reluctance to drop their prices, but now the balance of power has shifted so that those who really do need to sell will have to accept the lower prices buyers are willing to pay.”

Lower interest rate expectations bring change in buyer sentiment
Despite lower price expectations, a greater proportion of people are cautiously optimistic about market conditions being conducive to purchasing a house. A net 9% (up 18 percentage points from Q1 2008) see now as a good time to buy a house, slightly above early 2007 levels.

“This improvement in buyer sentiment coincides with a marked swing in interest rate expectations,” says Mr Tuffley. “Would-be first homeowners with relatively small deposits are particularly sensitive to interest rate changes because of their effect on how much debt they can afford to service.”

Mortgage rates started to move down in early May, and again in June, the market reacting to the Reserve Bank of New Zealand’s announcements regarding a likely series of drops in the Official Cash Rate. This market sentiment fed through to the survey, with only a net 7% of respondents now expecting interest rates to rise, a huge swing from the net 54% in Q1 2008.

What does all this mean for the future?
Declining interest rates will help to gradually bring some stability back into the housing market, but prices are likely to remain subdued in most regions for a couple of years.

“House prices remain high relative to incomes, and there appear to be few magic bullets in the wings that will change this. That aside, there is a glimmer of hope on the horizon, with some easing of pressure on household finances likely to come over the next year through lower interest rates and tax cuts.”