Bollard says residential house prices may fall

By NZPA

Thursday 2nd September 2004

Reserve Bank Governor Alan Bollard today warned residential property investors to be wary about possible falls in house prices in the next couple of years.

"In housing, as with any other investment, it's the investor who takes the risk, thus it's the investor who needs to be careful," Bollard said in speech notes.

However, Bollard was careful to state that the Reserve Bank was not forecasting "a calamitous fall" in house prices over the next few years.

"A reasonable view is that house prices are unlikely to rise much further over the next two years, and some falls are certainly possible, particularly in some regions," he said.

He said some of the key drivers of the nationwide property boom were easing, such as rapid population growth.

Bollard's speech was for a New Zealand Property Council conference in Rotorua today, and ahead of his monetary policy statement on September 9.

The official cash rate (OCR) is currently at 6.0%, but the market is unanimously factoring in a 25 basis point rise to 6.25%, and is increasingly playing up chances of a further rise after that.

The red-hot property market and its associated wealth effects have been a factor in the economy's robust recent performance, and have been a key factor in Bollard's OCR rises during the past year. While the nation's financial system could withstand a marked fall in house prices and a deterioration in the labour market, "some individuals could nevertheless be hurt if such a scenario was to eventuate," Bollard said.

Like a number of other OECD countries, New Zealand had experienced a very strong housing market in recent years with significant price increases.

Bollard cited Australia, the United Kingdom and the United States as examples.

"In many cases their upturns started a little earlier than New Zealand's and the subsequent cooling seems a little more advanced," he said in the speech notes.

"Most market observers... agree that the upswing has now peaked and that demand is gradually beginning to cool."

House sales had edged down over 2004, the number of new building consents appeared to be easing, and there was some cooling in the rate of growth in credit extended for housing purposes.

"Growth in housing rentals in New Zealand has been lagging rising house prices for some time now, and thus rental yields in many parts of the country appear to be declining," Bollard said.

Thus, he said, the success of "housing as an investment" might largely depend on the prospects for sustained capital gain over the coming years.

Last year Bollard commented on the potential vulnerabilities of some investors in the event the housing market cooled.

"Those vulnerabilities arise either from being disappointed in respect to capital gain or being unable to meet outgoings should interest rates rise further or the rental market weaken in the future," he said.

"Looking at the balance sheet of New Zealand households one might well ask whether these vulnerabilities are overstated.

"The share rise in house prices has to date made New Zealand households considerably more wealthy, at least on paper."

The Reserve Bank estimated that the household sector's net wealth stood at $345 billion, or about triple annual gross domestic product (GDP).

"That was up from $260 billion (or about 2.5 times annual GDP) in 2001.

"This improvement in net wealth was despite households taking on an extra $23 billion worth of debt over the same period.

"Surely, we need a very large and unprecedented fall in house prices to reverse that improvement?"

Meanwhile, Bollard noted that the ratio of rural land prices to agricultural operating surplus was above its long run average.

"Whether there will be a downward adjustment in prices presumably depends on whether market participants also reach the conclusion that rural land is over valued," he said.

Investors in commercial and industrial property appeared to have learnt from the 1980s experience, and little speculative building was being done without tenants first being finalised.

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