Housing market unlikely to be able to withstand rate rises

By Benn Bathgate

Thursday 27th January 2011

Despite stabilising, the housing market "remains very fragile and unlikely able to withstand rate increases for some time, particularly as house prices continue to decline," said ASB economist Nick Tuffley.

Speaking in the wake of the RBNZ decision to keep interest rates on hold at 3%, Tuffley said that while the RBNZ was a little upbeat on signs the economy would pick up, "it wants to be certain the recovery is firmly underway before resuming the tightening cycle."

He said he expected rates to remain on hold until September and that despite unexpectedly lower GDP over the third quarter and retail spending weakness in the fourth quarter, RBNZ was mildly positive on the outlook.

Strength in trading partner growth, a recent pick up in business confidence and surge in imports of capital equipment were proving stronger forward indicators, Tuffley said.

He said the RBNZ remained comfortable with the inflation outlook and that the key message is, "the RBNZ will remain on the sidelines until it has sufficient confidence the recovery is entrenched."

JP Morgan economist Helen Kevans said that while Reserve Bank governor Alan Bollard noted recent weakness in domestic activity, his commentary was not as downbeat as expected as he focused more on the "more promising" economic outlook.

Kevans said she believes the OCR will remain at 3% until at least June, "with the risks skewed toward a later move should the economic data continue to disappoint."

Deutsche Bank chief economist Darren Gibbs agreed with the ASB assessment that rates were likely to remain on hold until September.

"In our view the RBNZ seems to be very comfortably on hold, with no inclination to reverse last year's rate hikes in reaction to disappointments thus far nor any immediate inclination to raise the OCR further," Gibbs said.

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