Bollard guarded on property slowdown

Reserve Bank governor Alan Bollard is expecting the property market to slowdown – perhaps. The Reserve Bank’s quarterly monetary policy statement included – as expected – a decision not to change the official cash rate. And Dr Bollard says he does not expect to change interest rates again for the rest of the year. For the property market, though, the message is mi

Wednesday, March 8th 2006, 12:00AM

by Rob Hosking

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In a classic “on the one hand/on the other” approach, the Reserve Bank’s monetary policy statement is projecting “a sharp decline in house price inflation over the coming years,” although the central bank says there are “considerable uncertainties around this projection.”

He pointed to low rental yields which is likely to make property investment much less attractive as the large capital gains of recent years starts to slow.

“However, the projected downturn in residential investment is reasonably muted by historical standards. Unlike previous cycles, net immigration is expected to remain positive, underpinning residential investment activity to some extent.”

Also keeping the residential property market buoyant is consumer credit growth, despite the interest rate hikes over the past 18 months.

“If this credit growth remains strong, this may point to housing market activity holding up for longer than expected.”

The Reserve Bank notes that about 40% of existing fixed-interest rate mortgages roll off this year, and the average interest rate of these is just below 7.3%.

This should cause a further slowing of the market, although the Reserve Bank adds the caveat that this depends on whether the recent fall in interest rates does not continue.

Rob Hosking is a Wellington-based freelance writer specialising in political, economic and IT related issues.

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