Correction could be on the cards for Auckland housing

Posted by MarkL on January 26, 2015

A leading New Zealand fund manager and economic commentator has picked Auckland house prices could drop by as much as 25 per cent. 

Brian Gaynor, executive director of Shortland St-based Milford Asset Management who writes a column in the Herald Weekend Business told interest.co.nz's Gareth Vaughan that a big correction could be in store.

"Property's hard to pick. There's no question about it there's massive momentum to the property market. The way that the property market normally runs out of steam is a big increase in supply. The supply doesn't look like it's coming this year. So I can see housing going even higher.

"But it is a major medium term concern because there's no question in my mind at some stage, and I don't know when, the property market will come back. And it will come back 10, 15, 20 or even 25 per cent and that will have a really devastating impact upon the New Zealand economy because of the high level of debt. Will it be this year? Probably not, but it could be. Will it be next year? I'm not sure. It could be two or three years time but it will happen at some stage," he told Interest.co.nz. 

Mr Gaynor said it was a supply and demand issue and there was limited supply in the market in Auckland and big demand. He said that when more houses came online and factors such as an improving Australian economy started to weigh in there could be a big correction in house prices. 

"It's supply. It's a big increase in supply and a big upturn in the Australian economy. When all of a sudden Australia does better you get people leaving, going to Australia and you get less New Zealanders coming back here, and at the same time there's a big increase in supply. Supply is normally the major thing that kills it and we're not getting the supply this year, and particularly in Auckland we're not getting anything like it."

Dominick Stephens, Westpac's chief economist, said told the New Zealand Herald he agreed with Mr Gaynor but had a more conservative outlook, saying they were forecasting a five per cent drop by 2018. 

"Our forecast has been for declines of 2 per cent per annum in 2017 and 3 per cent in 2018 so 5 per cent overall. But there's a wide range of possibilities and a sharper decline is certainly a possibility," he told the Herald. 

"So for some time, we have been forecasting declining house prices later this decade and we have been for many years. The basis we have for those predictions is interest rates. For now, they're falling and we expect house price appreciation.

"But later in the decade, I would expect them to be higher than they are now so we would expect house prices to decrease. If the Australian economy improves, that will have an effect on net migration and I don't think people understand how much the Canterbury rebuild has contributed to the economic upturn through the middle of this decade and it's set to peak in 2016," Stephens told the Herald.