January 2017 overview: Themes worth thinking about

2017 written with sparklers

It’s that time of the year. Media commentators are lining up to provide a “guess” (aka forecast) as to what might happen this year.

Our turn.

When it comes to forecasts we’ve got a reasonable track record on interest rates, but perhaps not so good on Auckland property prices of late. Fair to say we didn’t see them getting this high, but all of the risks we’ve harboured concerns about are still there. Someone once said, if you wait long enough you’ll eventually be right. And with that in mind, here is our forecast guess for the year ahead…

My view is that house prices will be a real mixed bag, with some areas of strength and some of weakness. It will be driven at a much more localised level and will depend on the type of property. One thing’s for sure, it is an amorphous housing market. The Chinese are out for the count. More broadly, property investors will continue to struggle with the Loan to Value Ratio (LVR) limits and be nervous about price falls. The credit crunch will continue to bite and also limit small scale development. Speculative land acquisitions will slow down a lot and some of the crazy prices paid for land will likely soften. Some commentators are hedging their bets suggesting the market will come back. It wont!

That said, there is plenty of demand from owner-occupiers: immigrants, first homebuyers and those who will take the opportunity of a softer market to upgrade. Auckland City simply isn’t building houses so the supply/demand imbalance will continue and will support current house prices. Mortgage rates will increase into the low 5.00% range but then settle down. I warned about rising rates back in October. At the moment mortgage rates are being driven up by bank profit growth pressure and funding costs. Longer term rates could easily go up over 6.00% but only once the RBNZ signals that it intends to lift the Official Cash Rate (OCR). For now, I think rates have done their dash and will settle down.

Geo-politics is going to stay a big theme with Trump, BREXIT, the EU and China all grappling with issues. There is going to be an ongoing risk of a market shock, but from ‘what’ is anyone’s guess.