Housing market bottomed: RBNZ

The housing market may have bottomed out, the Reserve Bank predicts.

Friday, May 18th 2001, 3:22PM

by Jenny Ruth

Declining mortgage interest rates combined with still relatively high consumer confidence levels suggest activity in the housing market may have bottomed and started to pick up again, according to the Reserve Bank.

Although the central bank notes that asset prices aren’t showing any signs of pressure, it says there’s been a "mild" pickup in housing sales.

"Eventually this should encourage activity in the construction sector, allowing residential investment to make a modest positive contribution to GDP growth," the Reserve Bank says in its latest monetary policy statement.

"Moreover, with the remarkable expansion in the Australian economy having slowed, the number of New Zealanders leaving for Australia to seek work there will probably decline, reducing the net outward migration flow of over 12,000 people (in the year to March 2001) that held back residential investment," it says.

Nevertheless, the Reserve Bank is still expecting the improvement to be modest.

The central bank says while housing values grew 43% between 1994 and 1997, there was no growth in the three years ended December last year. And in the last five years, households’ debt ratio has risen from 85% to more than 110% of annual disposable income.

"Households that are becoming increasingly cautious about taking on more debt," it says, noting that growth in household credit is now slower than it has been for more than two decades. Even so, it is still running at about 6%.

Its latest forecasts assume households will be more cautious about spending in the next few years than was previously the case.

This should be good for mortgage holders. The Reserve Bank says that while we were piling on debt, interest rates had to be higher than would otherwise have been necessary.

If we are indeed becoming more debt-averse, "inflation-adjusted interest rates may not need to be as high through the current business cycle as they were through the last business cycle," it says.

In fact, current interest rates may be putting more of a brake on household consumption than the central bank has allowed for, it says.

Overall, the monetary policy statement was non-committal about where interest rates are headed in the immediate future and economists are divided. A recent Reuters survey of 15 economists showed six expect no further rate cuts after yesterday’s 25 basis point reduction, eight expect a further cut of 25 points and one expects more.

« The time is near for capped rate loans

Falling rates stimulate market »

Special Offers