The government expects five years of growth in house prices, outpacing growth in wages

Leading government economists warned that house prices are likely to continue rising “for some time,” as the Treasury released its latest set of economic forecasts showing a nightmare scenario in which house prices rise roughly double the wage rate for the next five years.

The Treasury Mid-Year Economic and Fiscal Update expects home prices to grow roughly four times faster than wages next year and roughly five times faster than the economy as a whole, rising 8.5 percent in only twelve months. Wages are expected to increase only 2.3% during the same period.

Data from REINZ last month showed that the median home price nationwide hit a record $ 749,000 in November 2020, up 18.5% from $ 632,000 in November 2019.

The government, surprised by the accelerated growth, will spend the summer reflecting on what to do with the housing crisis. He has received policy advice from the Treasury and the Reserve Bank and promises to announce changes in housing policy next year; this could include tax changes and even a major government building program, Finance Minister Grant Robertson hinted during a Treasury update in Wellington on Wednesday. .

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The Treasury’s predictions come as ANZ, New Zealand’s largest bank and the holder of the largest slice of the national mortgage book, suggested that New Zealanders must accept that house prices should fall or risk a painful economic correction in the future.

“Political participation is needed for a fundamental change within the housing market.

“Allowing the market to run more freely would pay off, collectively and over time, even if some owners have to give up something now,” the bank’s economists said in their latest Property Focus report.

“Not only would this help affordability, but a supply-induced managed decline in house prices is a much better outcome than a painful correction, which is a risk under the current market structure.”

But the big changes appear off the table, at least for now.

Prime Minister Jacinda Ardern has previously said she wants a “sustained moderation” in house prices, noting that Kiwis are expecting that house prices will continue to rise.

Regardless of what the government actually decides to do, its main economic agency believes that the crisis will not abate for some time. Its forecasters blame the crisis on almost every level of government: from migration to taxes to planning.

The heart of the problem is that “population growth has outpaced new housing growth over the last decade.”

The Treasury blames this problem on government land use laws that make it difficult for the housing market to build enough houses to adequately meet market demand.

“Uncompetitive urban land markets limit expansion, intensification, and therefore the rate at which new homes can be brought to market,” Treasury said.

But the Treasury also acknowledged that savers turned to investing in housing. Although the tax was not mentioned by name, it is widely accepted that the preferential tax treatment of housing has driven a wave of investment into housing, driving prices up.

“Housing is a preferred form of savings,” Treasury said.

“So, when combined with periods of high population growth, there is a greater likelihood that demand growth will outpace supply growth and therefore increase prices.”

The government is expected to announce some kind of change in the fiscal configuration around housing next year.

Good news is on the horizon, but it is spotty. Construction consents have risen, although the Treasury believes that uncertainty and capital constraints due to labor shortages will mean that consent rates will stabilize next year. They are expected to recover by the end of 2022.

Any “sustained moderation” could take a long time, as the Treasury warns that a “sustained period of high-rise housing construction and / or reduced population growth (due to border restrictions) will be required to fully address accumulated shortages in the past. , and based on past experience, prices are likely to rise for some time given the backlog of orders. “

The backlog could be proven by the reopening of the borders sometime next year, with the Treasury forecasting that net migration will rise to 43,000 per year by 2025.