Expectations of higher house prices increased markedly over the three month period. The net percentage expecting higher prices jumped to 43 percent - its highest level since the end of 2003, when housing activity was at its zenith.

A breakdown of the net figure is:

• 54% expect higher prices (36% previously);
  
• 10% still expect lower (16%), the difference being the net 43% plotted opposite;
  
• 32% stay the same (45%);
  
• 3% don't know (3%).

Despite the shift to a decidedly positive market outlook there has been little shift in perceptions over whether or not it is a good time to buy a house.

The breakdown is:

• 29% say a good time to buy (30%);
  
• 22% say a bad time (24%);
  
• giving the difference of a net 7%, plotted opposite (6%);
  
• 43% say neither good nor bad (38%);
  
• 7% don't know (8%).

It appears that the RBNZ's increasingly tough stance is sinking in slightly, with fewer people expecting interest rates to fall over the next 12 months. Expectations of higher rates were static, though may shift up as the RBNZ Governor's most recent message sinks in.

The breakdown is:

• 50% expect higher rates (50%);
  
• 5% expect lower rates (9%), the difference being the net 45% plotted opposite;
  
• 31% stay the same (27%)
  
• 13% don't know (13%)

What does it all mean about current market conditions?
The survey results are consistent with other recent housing data that point to the housing market having picked up at the end of 2006.

Turnover is well above average in recent months, and has increased over the last 12 months. REINZ turnover in the fourth quarter of 2006 was 9% higher than the corresponding period in 2005.

Turnover in January (not known yet) is expected to be robust, given the high level of loan approval activity we have observed over the last month.

To be sure, despite the discussed pick up, the number of dwelling sales remains below the peak of 2003, and the annual change in house prices is well off the level observed in the 2003 peak

 
Sale prices also indicate a revival in the last quarter.

Median sale prices pressed higher, eclipsing previous highs in a number of regions. The REINZ median house price reached a new high of $330,000.

The sales-adjusted QV NZ House Price Index has shown a similar story over 2006 (official Q4 figure is not yet available). There is little evidence of moderation of the 2.5% per quarter rate of average house appreciation experienced during recent quarters.

Indeed, the up-tick of price expectations we have observed in this survey is indicative of acceleration house price appreciation.

 

However, although the survey results do point to the housing market showing strength right now, other factors (detailed below) council expectations of another extended boom.

The Reserve Bank Governor recently stated that "In the absence of clear indications of a moderation in housing and domestic demand, it is likely that further policy tightening will be required'.

The findings of this survey provide no evidence of moderation in housing data over the coming months. Recent news on the housing market indicates the market is regaining some momentum. That is in keeping with broader economic signs that show the economy has found its feet after slowing over the past two years.

We expect the Reserve Bank will increase the Official Cash Rate in coming months.

Accordingly, it is pleasing that the majority of survey respondents are expecting interest rates to rise, and are hopefully factoring this into any purchasing decisions.

Fixed mortgage rates dropped in early 2006, but rose steadily through the year and are now back at similar levels to late 2005. We expect that rates for all terms will remain high over the next 9 months. And the risks of higher rates are significant, given the RBNZ's hawkish recent comments

In the short-term, house prices look set to remain firm. Since petrol prices dropped back over August and September there has been a widespread pick-up in confidence: housing, consumer, business.

However, the housing confidence survey was more equivocal on whether households' expectations of higher prices will translate into a more prolonged pick-up in the housing market.

Factors such as a renewed uptrend in net inward migration will give housing a boost, but 'fundamentally' the market is stretched after 4 years of strong price growth.

As we have pointed out in past housing confidence surveys, measures of affordability are stretched.

One such affordability measure is the size of an arbitrary deposit relative to per capita income. Assuming a 20% deposit is required, at median sale prices that deposit is now equivalent to over two and a half times the average person's disposable income nationally and three and a half times the same income for an Auckland house. This is a crude measure, but it does indicate a clear upward trend in the proportion of the 'average' disposable income needed to make an entry into the housing market.

Debt-servicing costs of buying a new home have also been pushed up. Again we use an arbitrary measure as an illustration - the interest that would be paid to service a 100%-financed loan for the purchase of the median-priced dwelling.

The ratio is now considerably higher than it was during 1998 (when the Variable rate was over 11% p.a.).

Sentiment, particularly expectations of further house price gains, appears to be contributing to housing's continued buoyancy. But cash flow is what services any debt, not capital gains.

Debt-servicing costs are set to rise slightly further. It now looks 'likely' (to quote the RBNZ) that the Official Cash Rate will be lifted before long. But even in the absence of a further Official Cash Rate increase overall interest rate expenses will grow. The increasing take-up of fixed-rate mortgages has meant that some households have yet to feel the full impact of the RBNZ's actions.

As people roll off fixed terms and face higher interest rates, a greater proportion of those people's incomes will be diverted into paying the mortgage. Moreover, household debt in total continues to rise at a pace of around 1% per month - well in excess of income growth.

Nevertheless, it is not one-way traffic. Migration is one tangible factor that is no doubt partly behind the recent up-tick in the market. But even though the net inflow has been picking up, it remains well down on the peak inflow that contributed strongly over 2002 and 2003 to the housing boom. In other words, migration is a modest positive at present, though not the strong stimulus it once was.

The tight labour market is likely to loosen a touch and see slower growth in job creation. Even so, the unemployment rate is unlikely to rise much and remain sufficiently low that overall perceptions of job security remain high.

Affordability has become increasingly stretched by the sustained boom in the housing market of recent years. House price growth has dwarfed household income growth and, for property investors, rental income growth has also been left behind. The RBNZ's actions in raising the OCR have also progressively pushed up the cost of servicing debt.

At some stage affordability will get stretched to the point where demand will ebb, bringing with it a period during which house price growth is subdued enough to allow income growth and population growth to catch up.