What's going to happen with house prices?

The Waikato Times reported recently that property is Hamilton is going up on average by $1700 per week! There have been rapid rises in other regional centres this past month as well.

While these prices rises seem to be speeding up there are the beginnings of comments that the end of the price rise cycle is near. How near is the big unanswered question...

In a speech yesterday, deputy governor Grant Spencer said growing housing market pressures across the country mean the Reserve Bank is considering several macro-prudential policy options. Prices will continue their upward charge until changes are made, and even then I don't see prices dropping, merely increasing more slowly or flattening off. There is still a shortage of houses in Auckland which means demand is always going to outstrip supply and because of that there are people moving to the regions because it's more affordable. A lot of demand has been driven by investors though, which has spread from Auckland outwards. It began with Auckland investors and local investors have jumped on the band-wagon. Therefore it's almost certain that the Reserve Bank will impose further restrictions, aimed at investors. It could be LVR restrictions so that 30% deposit is needed throughout the country (and maybe more in Auckland), it could be an income to debt ratio, and it could even be restrictions on being able to structure your loan on interest only. Banks are also already providing better interest rate discounts for owner occupied loans than investment loans. Imposing further LVR restrictions on investors is the most likely first step the Reserve Bank will take because systems are already in place. There is speculation that there will be a rush to buy investment property before the restrictions begin (this could be by the end of this year) which will push prices up rapidly in the short term. LVR restrictions haven't had the desired impact of controlling house price rises so far and that means it's likely once these are in place, other measures will be implemented as well.

If you are looking long term, I still think investing in property is a great idea. New Zealand is seen as a safe country with plenty of resources and a growing economy. We are always going to have immigrants wanting to move here and so there will always be demand for housing and rentals. No one can ever rule out any major catastrophe upsetting the balance of our economy, so having an exit strategy and aiming to repay your debts should always be high priority.