Year Ahead Forecast
Peter Norris shares his views on what we can expect in 2018.
1 February 2018
Here’s my view of the year ahead and my rationale for that forecast. To be honest it’s no different from the view I’ve been writing about for the past six months.
Let’s start with the big picture. The economy will tick along with business as usual. Kiwis and businesses just get on with it and I wouldn’t expect anything different. Growth will be flat across much of the economy with Auckland continuing to kick ahead of the rest of the country off the back of technology based growth. Technology is a very interesting topic this year but I’ll save that for another article – there are some seriously cool technologies coming!
Bank Criteria Tight
Much will be made of the foreign buyer exclusion, but as I’ve said before, it’s a complete red-herring. Foreign buyers were never the issue, it was residents buying with deposit funds from offshore. Capital controls in China have slowed the transfer of funds, but the biggest impact has been tighter bank criteria, particularly around income. It is these latter points that will limit Chinese buyers in 2018. But it will limit all buyers, not just foreign. Credit policies are going to continue to tighten, but will likely be offset by bank greed and a desire for market share. So, whilst borrowing will be harder to get, banks will fight hard for the deals they do want to write.
Confusion is ongoing to be the story for some time yet. - Peter Norris
New Build Worry
The new-build market looks vulnerable. We have plenty of land under development in Auckland. In my opinion, land developers are going to get burnt or at least have to face significantly lower profits. Builders are going to struggle to sell at current prices in a softer market. Unlike existing stock, developers and builders must meet the market eventually and you’ll see that reflected in prices. My strong opinion is that there will be blood on the floor in the next couple of years and it will be the blood of smaller builders developers who are sitting on land that they can’t get rid of and can’t afford to cut their margins on. Unfortunately, there are a fair few of these.
I would not be surprised to see a 10% drop in valuations on completed product and a 20% drop in land values. The same applies for sub-divisible inner city sites where speculators have paid too much. To my point above, those that have paid too much could find themselves in trouble here.
Inner-city properties in popular suburbs will by and large hold up. We still have a growing population, solid GDP growth, low interest rates and existing owners have benefits from strong equity growth. First home buyers and upgraders will continue to support this part of the market. If you haven’t already, then read John Bolton’s article Auckland's Growth Party and learn how that applies to the central city.
House sales volumes were at historically low levels throughout 2017. I expect that to stabilise for the next two to three years with ongoing soft volumes. Overall, reported house prices will come back 5-10% (most of which is already priced in) but will otherwise remain static. It will come down to simple supply and demand. 2018 will be a buyer’s market, just don’t expect vendors to be overly negotiable.
Interest rates will remain stubbornly low. In the face of a soft housing market and low inflation, the Reserve Bank will be under no pressure to increase them. There will be more competition amongst banks and some new entrants in 2018.
2018 will be a mixed bag of confusing headlines. Confusion is going to be the story for some time yet. House prices will remain soft but generally be supported by low interest rates, ongoing migration, and growth.