Economist sees potential housing boom

Another housing boom could be on the cards, according to Deutsche Bank chief economist Ulf Schoefisch.

Wednesday, December 12th 2001, 11:27AM

by Jenny Ruth

He’s particularly concerned with the migration trend, which has seen net migration gains since the middle of the year and which accelerated in October with inflows stabilising at record levels while outflows fell to a five-year low. This suggests an annual 0.7% population gain following three years of losing population at about 0.3% a year.

These figures are too often overlooked. "The possibility exists that it may generate excess pressure in the housing market, not dissimilar to the mid-1990s," Schoefisch says.

While the Reserve Bank has built in a 20% increase in residential construction to its 2002 economic growth forecast, it doesn’t appear to have factored in a rise in construction costs to its inflation forecasts, he says.

Nor does the central bank have factored in the indirect impact of substantially higher house prices on the economy and inflation in general, he says.

A booming housing market added a percentage point a year to inflation in 1994 and 1995. "The possibility of a repeat performance is likely to reinforce the Reserve Bank’s caution about continuing the easing cycle," Schoefisch says.

The fact that Reserve Bank governor Don Brash now uses the official cash rate to set monetary policy, rather than his monetary conditions index, a measure of both interest rates and the currency, may mean interest rates won’t go as high.

The 90-day bank bills, from which floating mortgage rates are set, peaked at 10.4% in June 1996 and were again above 10% two years later. That compares with about 4.86% currently.

"In those days, interest rates were all over the place, but the underlying problem is not different, but the policy response maybe somewhat more muted," Schoefisch says.

"Monetary policy is a very crude instrument. You can’t fine-tune it too much. If things got out of control, I’m sure Brash will be as concerned as he was in the mid 1990s."

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