Keeping house prices high

The housing market is quite complex, which makes it reasonably difficult to predict which way it will move with any degree of accuracy. The two main determinants are supply and demand, but other aspects come into the equation as well.

Indicators are starting to show a turning point for property prices in general. On the demand side;

1. The economy is starting to slow,
2. Employment has fallen slightly,
3. Floating interest rates are expected to creep up over the year, fixed rates have already moved
4. Migration is falling off from historical highs over the past two years.

On the supply side, new buildings are occurring at a high rate.

None of these aspects, with the possible exception of migration, are changing dramatically, however they are still moving in the wrong direction to keep house price increases at the level we have seen over the past two years.

Not all factors are negative however. One aspect of house price movement is the cost of building a new home compared to buying an existing home. Most people usually prefer new houses to old ones, but if the cost of new homes increases then old homes start to look more affordable and appealing. New construction requirements have been announced as a result of the leaky home situation that will add around $2,000 to $3,000 to the cost of building a home. This factor, along with the rise in the cost of materials and labour, has seen the cost of building a home increase substantially, which is likely to drag up the price of existing houses as well.

Although most influencing factors in house price movements are pointing towards a slowdown, the increased cost of new home building is likely to have a counter affect. It is unlikely to have a large degree of influence on its own however.

Investors should also remember that New Zealand is not one large homogenous market as well. Specific areas may have already begun to slow down while others may be late starters. It is always essential to know the local markets that you are involved in and what they are doing. You can then make amendments to your property plans if this is required.