Housing market slowing down

Activity in the housing market has already peaked although housing construction should remain strong for the rest of this year, Deutsche Bank says.

Monday, July 29th 2002, 1:46AM

by Jenny Ruth

It notes in its latest economic forecasts that housing turnover rose about 40% in the past year and building consents are up about 25%.

Data over the past few months has suggested that growth in turnover of existing houses has peaked, which is consistent with the actual and expected further rise in mortgage rates.

The major banks' floating mortgage rates have risen from 6.7% to between 7.95% and 8% over the course of the year as the Reserve Bank raised its official cash rate (OCR) from 4.75% to 5.75%.

Deutsche Bank is forecasting the OCR will peak at just 6% with the last 25 basis points being added on 14 August when the central bank releases its latest monetary policy statement.

"With GDP growth forecast to slow considerably and the rapid rise of the New Zealand dollar expected to cause CPI inflation to fall to the mid-point of the zero to 3% target range over the next year, we expect the bank to see no need to tighten interest rates beyond the estimated 'neutral' level (of 6%)."

Other banks are forecasting no change to the OCR in August.

An OCR at 6% and yields rising for longer-term instruments suggest average mortgage rates of about 8%, Deutsche Bank says. "While that is considerably lower than the peak in previous cycles, it is still expected to generate a significant slowdown in housing market activity," it says.

That's because household debt levels have continued to rise and are now about 110% of disposable household incomes so higher interest rates will bite harder.

Deutsche Bank expects construction costs will continue to add to inflation pressures until early 2003.

"Rising house price and construction cost inflation have revived memories of the mid-1990s boom. However, at this stage it remains unclear to what degree housing sector inflation will pick up," it says. It is forecasting house price inflation will peak at about 8% while construction cost inflation is unlikely to exceed 5% a year.

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