Westpac says that if the Official Cash Rate doesn’t rise by July 2013, the country’s housing market could go from warm to “positively frothy”.
By Susan Edmunds
In its Economic Overview for August, bank chief economist Dominick Stephens said the Reserve Bank was allowing interest rates to remain low because inflation was unthreatening and the dollar still uncomfortably high.
But the flow-on effect had been that the housing market had had a resurgence this year, Stephens said. “The housing market has been the standout performer of the last year. Auckland and Canterbury continue to lead the way in terms of price growth, reflecting their respective supply constraints but prices are now turning higher nationwide.”
“This situation could persist for a while, so we now expect no change in the Official Cash Rate until July 2013.”
He said if interest rates stayed low further into next year, the housing market could be expected to take off. “Although we don’t expect a replay of the self-reinforcing spiral of rising house prices, debt and spending that characterised last decade, we are concerned that New Zealand’s economic imbalances could make a comeback of some sort. As Mark Twain once said, history doesn’t repeat itself but it does rhyme.”
The Westpac report pointed out that housing debt has grown 1.5% in the past year, compared to the double-digit growth in 2003 through 2007.
“Some of this can be attributed to ‘deleveraging’, albeit mostly of the passive kind – since mortgages have a schedule for repayment of principal, deleveraging is the default setting.”
A number of borrowers had also kept their repayments at the same level as interests fell, so were repaying their mortgages faster.
Westpac’s economists said they expected annual migration to shift from a net outflow to a modest inflow of about 10,000 by the end of 2013. “There are very early signs that the outflow of New Zealanders to Australia has peaked, albeit at a higher level than we anticipated.”
Should the worst happen in Europe, Stephens said the Reserve Bank would try to offset the increased cost of borrowing by lowering the OCR further. “But it may not be able to cut the OCR all the way to zero because a sharp decline in the exchange rate could prompt higher inflation.”
He said it was unclear which way mortgage rates would go in the event of “Eurogeddon” but it was more likely that they would rise than fall.
Westpac said a full-blown banking collapse in Europe was unlikely but the possibility shouldn’t be ignored.
Source: Landlords.co.nzcomments powered by Disqus