Rising interest rates have not squeezed expanding house market

By NZPA

Tuesday 2nd July 2002

Rising interest rates have failed to pinch the expanding housing market so far, and commentators say there is no house price bubble in New Zealand yet.

With most economists picking the Reserve Bank to raise interest rates tomorrow by 25 points to 5.75 percent, and eventually to the 6.0 percent considered "neutral", the rate-sensitive housing market should, in theory, start appearing constrained.

However, house prices have continued to soar, albeit from a low base, with the latest Real Estate Institute (REINZ) figures showing a 10 percent annual rise.

Bank of New Zealand economists said the continuing weakness in world equity markets had led to an international attraction to investment in housing. In the US that has led to fears of a housing bubble which will eventually burst, but that is not expected to happen in New Zealand.

Kiwis have always favoured investing in housing for psychological and practical reasons. New Zealanders' housing investments currently make up 61.4 percent of total assets, compared with 34 percent in the US, where that level has provoked cries of alarm.

"This starkly highlights New Zealanders' underinvestment in non-housing assets, but doesn't show any of the worrying shift in asset holdings that the US is experiencing," BNZ Treasury economist Craig Ebert said in a commentary today.

The current level is historically low for New Zealand, down from 65 percent of total assets at the height of the boom in March 1990.

In addition, the value of New Zealand's housing stock has fallen, now standing at 147 percent of gross domestic product, from 175 percent in December 1987. That compares with 163 percent of GDP in the US.

While annual house price inflation has risen by between 4 percent (Quotable Value NZ) and 10 percent (REINZ), that is "nothing out of the ordinary", Mr Ebert said.

Median house prices fell by $1000 in May from April levels to $188,000, according to REINZ, although the median is still 10 percent above the May 2001 price.

Acting Reserve Bank Governor Rod Carr told the Finance and Expenditure Committee in May that the bank did not judge movements in asset prices, including houses, to be "playing a big role in shaping inflation pressures at the moment".

Factors behind the housing market's strength include low unemployment, a strong labour market, steady wage growth, high consumer confidence, and spending is on a roll, offsetting weaker returns from commodity exporters.

Net immigration, another key to house prices, is likely to ease by the end of the year according to the Reserve Bank's forecasts.

"Immigration is probably more of a temporary pressure this time around, whereas last time around (in the 1990s) net immigration was a persistent inflow of people over quite a few years," Mr Ebert said.

"The housing market has been strengthening for six, nine months. It's one of those classic sectors that gets going in a low interest rate environment, and rates have been historically low. So that's another reason to think there's a cyclical reason for the housing market to be so strong."

The market has lagged interest rate movements, taking some time to pick up steam last year and maintaining it in a rising interest rate environment this year.

"It is quite a lag, if you wait for it to happen by the time you start seeing it, it's too late," Mr Ebert said.

"It's dangerous also because there might be fundamental reasons for it to happen -- demand pressures outstrip supply -- or it could just be happening in people's psychology," he said.

Massey University senior real estate unit lecturer Graham Crews said the housing market was still making up lost ground, following a languishing market for the previous three to four years.

Rising interest rates had less of an influence on buyers who felt confident in their job, had strong wage growth, or had planned the decision for some time.

"Every time interest rates go up they take some people out of the market, but right now the market's got a head of steam.

"The decision-making is a lot more prudent than it was in the mid-90s, and I don't anticipate that there's major speculation involved here," Mr Crews said.

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