ANZ economists have raised their forecast of house price growth and now see a 4% rise for the second half of this year

By David Hargreaves

The housing market could be set to see the return of FOMO - the fear of missing out - but if so, it won't last, economists at the country's largest bank say.

In ANZ's latest Property Focus, ANZ economist Andre Castaing, senior economist Miles Workman and senior strategist David Croy said house prices have been moving higher at a steady pace, rising 0.7% in each of the last three months.

"Annualised, that’s a solid 8.7% p.a. While each of these monthly rises have only been slightly above our expectations, collectively, they show that the housing market has more momentum than we previously thought."

They've therefore revised up their near-term house price forecast upwards and now see prices lifting around 4% (previously 3%) over the second half of this year, with house prices rising at around their current pace until autumn next year.

"Applying our forecast for growth in the national house price index to the median sale price implies the median home selling for approximately $812,000 by Christmas, up from $780,000 currently."

The economists expect some of the house price growth will be caused by "animal spirits".

"With the market clearly having rounded the corner, FOMO could make a comeback," they said.

But not for long, they reckon.

"...We doubt it would last, given upside interest rate risks, and unemployment expected to rise. Our outlook is for annual house price inflation to come in around 5% over 2024, then moderate to around 3% in 2025.

"Once mortgage rates begin to subside, we expect house price growth to return to its long-run average of around 6% y/y. However, it should be noted that any forecast that far into the future is a best guess and should be interpreted as indicative only."

In noting the various uncertainties, the economists said that if the economy fails to slow sufficiently to cool core inflation, the Reserve Bank may be forced to respond with a higher Official Cash Rate (which is at 5.5% at the moment) than anyone is currently forecasting.

"And this would be expected to put the brakes on the housing market pronto."

Alternatively, if the labour market weakens significantly more than expected based on the monetary tightening we've already had, forced house sales may pick up just as prospective homeowners may find they don’t have the income security to enter the market or to upgrade their existing home.

"...At the end of the day, when it comes to the medium-term housing outlook the feedback loop between CPI inflation and house prices should be considered. That is, if upside housing pressures result in upside CPI inflation pressures, the RBNZ is likely to respond with hikes, stopping the housing upswing in its tracks. Be careful what you wish for."

In discussing the recent momentum in the housing market, the economists have noted the role of the first-home buyers.

"First-home buyers tend to be income-rich and asset poor. They tend to be younger and have well-paying jobs, but likely found the deposit required to purchase a house got ever more out of reach during the house price bubble of 2021.

"While house prices have been falling, these prospective buyers have been growing their deposits and may have been holding off buying in case house prices fell further.

"Now that house prices are 14.5% below their peaks, the deposit first-home buyers require is looking more attainable. For example, a home that was worth $700,000 in November 2021 will only sell on average for about $600,000 today, meaning that at an 80% loan-to-value ratio, the prospective buyer’s required deposit has shrunk from $140,000 to $120,000."

But the economists say there are also many first-home buyers whose incomes are not able to service a 7% mortgage rate, even if they have the necessary deposit.

"On the hypothetical $600,000 house from earlier, this mortgage would require $2,800 per month in interest payments with an 80% LVR [loan to value ratio]. This is double the $1,400 per month in interest payments needed in November [2021] to purchase a $700,000 house when mortgage rates were around 3%.

"In a nutshell, the constraint on first-home buyers entering the market has switched from deposit size to servicing cost as house prices have fallen and mortgage rates have risen."

This story was originally published on Interest.co.nz and has been republished here with permission.