Hold 'Ur Horses

Despite investor confidence in the housing market soaring recently,

Khoon Goh warns the market is still facing headwinds.

There seems to be an air of excitement over the prospect that house prices will start to recover, and rather strongly as well, from here on in. Housing confidence has certainly rebounded strongly, according to the latest ASB Housing Confidence Survey, with a net 54% of respondents believing now is a good time to buy, the highest reading since 2002.

Inventories of houses for sale continue to tighten, with only seven and a half months' worth on agents' books at present. This has resulted in the number of days to sell falling below 40 days for the first time since late 2007.

Anecdotes we are hearing suggest very good turnouts at open homes, with some houses beginning to sell at above G.V.

So are house prices set to take off from here: Regular readers of this column will know that I remain cautious over the outlook for housing. After falling 9% late last year, house prices started to recover and are now back to positive territory as at July. While recent momentum in house prices can continue over the next few months, I struggle to see a full-blown recovery just yet.

Rising unemployment is a key headwind working against the housing market. The unemployment rate jumped from 5% to 6% in the June quarter, and is set to rise further. As a result, wage growth will remain subdued for some time, and we are unlikely to see the 4% to 5% annual wage increases of the past few years.

Simply put, I cannot see house price growth outpacing income growth over the next few years. Fixed rate mortgages are starting to rise, eroding affordability for those who choose to fix. And while floating and shorter dated fixed mortgage rates remain at historical lows, they will not stay at those levels forever.

The warnings from policymakers should not be treated lightly.

If house prices do stage a sustained rebound, it would mark the shortest housing downturn in history (at least since decent records are available dating back to the 1960s). It is perhaps useful to refer back to the last housing downturn for a sense of a reality check.

After bottoming at -5% in late 1998, house prices did recover to post a 4% gain in the next 12 months, only to falter again over the next two years. A sustained rebound did not take hold until 2002. It is said that history does not repeat itself. But it does rhyme.

Those still adamant that the housing market rebound will he sustained should heed the warnings coming out from the Reserve Bank Governor and the Minister of Finance. The former has warned against a resumption of our "borrow and spend" habits, and the latter has not ruled out some form of capital gains tax in an attempt to prevent the housing market from taking off too soon.

The warnings from policy-makers should not be treated lightly. While the introduction of a capital gains tax is seen as political suicide by many and therefore unlikely, the Reserve Bank has already introduced new regulations which limit how much short-term money local banks can borrow from offshore to on-lend. And you can guarantee that there will be more regulatory changes in the pipeline. Property investors should therefore tread cautiously.

Article by Khoon Goh is a senior economist at ANZ Bank

NZ Property Investors Magazine September 2009