Real Estate- Price Predictions

This seems to be a likely scenario and is one reason why I'm not keen to leap into re right now- however, doesn't preclude prices continuing to rise slightly higher in the short-term.

House price inflation likely to cool slowly
19 September 2005

While house prices are currently greatly inflated compared with the long-term trend, it's likely to take a long time before they adjust back to trend, says Andrew Gawith, an economist at Infometrics.
Infometrics has analysed data on house prices going back 75 years.
"There are long periods where house prices stay away from the trend," Gawith told the New Zealand Mortgage Brokers' Association annual conference last week.
For example, in the early 1950s, house prices rose dramatically above trend and took 10 to 15 years getting back towards trend.
"In the late 1970s, house prices fell in real terms, although you didn't notice because inflation was galloping."
House prices got to 20 per cent below trend for a while and took 12 to 15 years to get back to trend, Gawith says.
House prices are currently 30 per cent over-valued compared with the long-term trend, he says.
"The question you've got to ask yourselves is will they adjust to the long-term trend tomorrow. That's what The Economist magazine's been telling every country that will listen."
If house prices fall 5 per cent next year, that's just a sixth of the gains above trend clawed back, he says.
Gawith attributes the boom to the fact that real floating rates have been extremely low as house prices were bolting.
"That suggests there's plenty of fuel sitting under the housing market. We think that will turn around as house price inflation cools and interest rates won't change much."
While debt-servicing costs are currently high, he expects that will ease over the next few years. The proportion of gross income needed to service a mortgage is 50 per cent in some cases now with floating rate mortgages and slightly less for fixed rate mortgages, he says.
People are prepared to take the risk of such a high debt burden because they expect their incomes to rise.
That's probably true going forward, given that there will be tax cuts regardless of who has formed the next government and because the tight labour market makes it likely wages will rise, Gawith says.
With building costs rising about 8 per cent a year and section prices rising about 22 per cent, since prices of existing homes are rising about 13 per cent a year, it's still cheaper to buy an existing home than to build a new one.
"That's why house prices continue to rise while building consents are dropping."
Gawith says the supply and demand position for housing is currently neutral but that the country is likely to be over-stocked in 2007 to 2009.