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Budget 2021: From 19.1% to 0.9% – could house price growth collapse by that much?

While Budget 2021 allocated an extra $380 million for 1000 new homes for Māori, its bombshell was a projected massive drop to nearly zero in national house price growth.

Housing Minister Megan Woods said 1000 papakāinga housing, affordable rentals, transitional housing and owner-occupied housing were planned.

But Finance Minister Grant Robertson announced bigger news: the Treasury is expecting house price growth between 2021 and 2022 to be 0.9 per cent.

Treasury says house prices are expected to be roughly 16 per cent lower than they would have been in 2025, if the Government had not implemented a range of housing announcements this year: a $3.8 billion housing infrastructure, an extension of the bright-line test and the scrapping of the interest deductibility programme.

The Real Estate Institute’s latest monthly data showed we have a long way to go to sink that low: new house price records have been set, with national prices up 19.1 per cent in the year to April and Auckland outstripping that, rising 21.6 per cent, REINZ announced on May 13.

“This is a very sharp adjustment in house prices but a very necessary one,” Finance Minister Grant Robertson said in today’s Budget lockup.

Treasury has warned that the decrease in expected house price growth will “dampen the economic recovery”.

But Robertson today did not appear worried about this warning.

Westpac is also forecasting a massive plummet in house price growth in New Zealand.

“Previously, we had expected house prices to rise by a further 10 per cent by the end of 2021, with further moderate gains expected in the following years.

“However, we now expect house prices to flatten off over the remainder of 2021. Looking further ahead, we expect longer-term interest rates will creep higher over time in response to the firming in global activity. As that passes through to domestic borrowing rates, we are likely to see modest falls in house prices of around 3 per cent to 4 per cent per annum over 2022 and 2023,”Westpac said.

Brad Olsen, an Infometrics senior economist and a director, backed the Treasury forecast.

“Yes there is a realistic possibility for house price growth to collapse to 0.9 per cent annually by 2022, as loan to value restrictions combined with the Government’s housing package to make investors reassess the housing market and the expectations of further capital gains,” Olsen said this afternoon.

But the Real Estate Institute has baulked at the 0.9 per cent figure. Wendy Alexander, REINZ acting executive, expressed disbelief.

“REINZ is surprised that Treasury is forecasting such a significant slowdown of house price growth in the coming year and the 0.9 per cent. REINZ has predicted easing of house prices in the next 12 months but we’re not anticipating growth at such a low level,” Alexander said.

The last time New Zealand had a rate as low as Treasury’s 2022 forecast was November 2015 when the annual increase was 0.2 per cent, she said.

“As we start to see the re-introduction of the LVRs having an effect it could be our expectation that house price growth will slow, but that this might be at a rate in the vicinity of 3 per cent to 5 per cent.

“It is our view that the lack of housing supply will continue to be an issue, particularly as we look to open the borders and we should see an uplift in migration into the country,” she said.

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