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It’s the time of the year when we buff up our Crystal Ball, gaze into the complicated world of economics and finance and come up with sufficiently generic forecasts/predictions to wow and amaze the crowd.

2018 Interest Rates Prediction

It’s the question on every mortgage holder’s lips.  And every new home buyer.  Where will interest rates be in a year or two?

At a very simple level, in the property market, interest rates are about controlling the money flow.  If money is a little too easy to get (often causing inflation), the Reserve Bank may raise interest rates.  If money isn’t flowing enough, then the Reserve Bank may lower interest rates.

The interesting thing about the past few years is that the Reserve Bank is increasingly pulling different levers to control money flow.  The most obvious one being the restrictions on LVRs.  (here is a summary of the latest changes to LVR restrictions).  This is a great option because the Bank can target specific people – in this case Investment Buyers – and still offer more money to first home buyers.

So where will interest rates be in 1-2 years.  With historically low interest rates now, the risk seems to be to the upside.  In other words, it seems more likely that the interest rates will move towards 5% rather than 3%.  The important question is, will it be back up to 7%, 8% or even (as per 2007) 10%?

With the Reserve Banks new love for LVR and lending restrictions, I don’t see this being a near-term risk.  They have plenty of options to cool a housing market if they need, without raising interest rates significantly.

My (completely random) prediction: 1 year discounted fixed rate will be 4.8% to 5% by December 2018.  Higher than currently at ~4.2%-4.5%.

2018 Housing Market Predictions

Auckland

Auckland has come off the boil in the past year and no one can really be that surprised.  The leap in values per annum over the past 7 years was unsustainable.  Note, it’s not unjustified.  There is a housing shortage, interest rates are historically cheap and money was reasonably easy to come by.

And it’s for these reasons that I think Auckland prices will sit within a range of their current values for at least 2 years.  In other words, my prediction is that Auckland prices will remain within 5% of their current value for the next year (or three).  Some suburbs will go up or down but, in general, it will be a pretty flat market.

Wellington and Christchurch

The saying is that if Auckland sneezes, the rest of the country catches a cold.  In the recent years though, Auckland has been having a Capital Gains Party and no one else has been invited.  My prediction is that 2018 is the year that Wellington and Christchurch start their own party (and don’t invite any Aucklanders).  My money is on around 10% growth on average for the 2 cities.

2018 First Home Buyer Prediction

I think we can all agree, no one wants to make it harder for first home buyers to get into the market.  And the Reserve Bank has certainly backed this up as of Jan 1st by making it slightly easier to borrow money with less than 20% deposit.

It would be a brave fortune teller that predicted things getting worse for first home buyers.  My prediction is that first home buyers will see one or two more boosts and bonuses before 2018 is over.  Most likely changes will be around the HomeStart Grant.  Although Labour spoke out against raising the Grant amount, it’s certainly time to reassess the upper limits of the HomeStart Grant and the Welcome Home Loan.

Summary Predictions:

Short of an egotistical nuclear war breaking out in the northern hemisphere, 2018 is all looking fairly rosy.  As a scorecard for December, here are my predictions:

  • interest rates up slightly (1 year discounted rate 4.8%-5%)’
  • Auckland house prices flat, Wellington/Christchurch up ~10%
  • first home buyers get a few bonuses to make it easier to purchase

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