Most homeowners still look 'reasonably well placed to meet mortgage commitments', ASB economists say; they see 'mild' house price rises this year

ASB economists don’t see much likelihood of a “significant” housing correction and expect “mild” price rises this year.

In their latest Economic Weekly publication, the ASB economists pose the question about a housing market correct and do point that complacency during a period in which global asset values are hovering around record highs, “can be dangerous”.

“However, at the current juncture, most homeowners still look reasonably well placed to meet mortgage commitments,” they say.

They say that according to Statistics New Zealand figures, close to four-fifths of all households with an outstanding mortgage spend less than one-quarter of their beforetax incomes on housing.

Only around 8% of households with an outstanding mortgage have housing costs exceed 40% of household incomes, and these households tend to have considerably higher than average incomes.

“If homeowners don’t have to sell during a housing downturn, they won’t.

“It would take a sizeable climb in mortgage interest rates coupled with a shock that significantly hit employment and local incomes to drive a significant fall in house prices.

“In the current goldilocks backdrop, it is hard to put an exact timeframe around when (or if) this might occur.”

The economists do say, however, there is the risk that a “localised shock” could cause significant disruption.

“Mortgage debt holdings tend to be heavily concentrated, with RBNZ figures suggesting that around 8% of households hold about 40% of total housing debt,” the economist say.

They are expecting a period of “mild rises” to house prices during 2018.

“Despite strong population growth, stretched affordability and policy changes, both here and abroad, are expected to prevent the housing market getting a fourth-wind since the GFC.”

Consumer spending volume growth, however, is expected to advance “at a solid clip”, supported by increasing labour incomes, the historically high terms of trade, still-low interest rates and a solid outlook for residential building.

The economists say much of the strong run-up in consumer spending volumes looks to be from consumers purchasing relatively more items experiencing relative price falls (e.g. consumer durables), with nominal consumption spending as a portion of nominal GDP around historical norms.

They say that one of the puzzles of late had been why consumer spending had been so mild despite the tightening labour market, sizeable increases in housing equity (which historically is closely correlated to consumer spending), still–reasonable consumer sentiment and strengthening residential investment.

It was thought that the global financial crisis (GFC) had elicited more caution from asset-rich consumers, wary of another downturn.

Unlike the run-up to the GFC, the household sector in aggregate had not used the rising equity of their dwelling as an ATM.

“However, recent revisions have helped solve this puzzle. Upward revisions to consumer spending (and overall economic activity) have helped to reassert the historically close linkage between house prices and consumer spending.”

There are, nonetheless, the economist say, good reasons to expect the two to diverge over the next year to two.