New housing policy knocks back inflation
The switch back to income-related rents on state housing will pin back CPI inflation early next year, but it's still not clear how much impact it's going to have on the property market.
Thursday, December 14th 2000, 11:24AM
by Paul McBeth
The jury's still out on the effect that changes to state house rentals will have on the property market. However, what is clear is that the changes will cause a one-off reduction to CPI inflation next year.
At the start of this month, Housing New Zealand moved back to income-related rentals for its tenants, reversing the market rentals policy that's been around for nearly a decade.
Statistics New Zealand has now explained how it plans to treat the impact of this. State house rentals make up a fifth of the 6.16 per cent that rentals contribute to the CPI. This component will fall in the first quarter of 2001 to reflect the fall in average state house rentals - from about $166 to $89 per week or lower - and translates to a forecast for first quarter CPI that's about 0.6 per cent below previous estimates.
Deutsche Bank economists said yesterday that their own CPI forecast was therefore down from 0.8 per cent to 0.2 per cent (for the first quarter 2001, quarter on quarter) and 3.1 per cent (year on year), compared with the Reserve Bank's 3.8 per cent forecast (year on year).
Deutsche Bank said that, in principle, this shouldn't alter the RB's central view of medium-term inflation pressures. "However, it will make the Bank more comfortable that its assumption of no significant second-round effects is not too optimistic."
Meanwhile, it's still not certain how much impact the housing policy changes will have at the lower end of the residential property market, either on house prices or rent levels. Housing New Zealand is building 400 new units this year and Housing Minister Mark Gosche believes more houses will be needed to meet demand, but noone's saying yet how many more will be built.
An article in this month's Residential Property Investor says that the lower end of the rental market has already faced declining returns over recent years and the addition of several hundred new buildings could well further this decline. It also says that lack of investor demand is also continuing to put downward pressure on prices for cheaper housing and first-home buyers aren't taking up the slack.