It has taken four consecutive interest rate increases to record high levels but New Zealand’s central bank looks to have finally taken the heat out

It has taken four consecutive interest rate increases to record high levels but New Zealand’s central bank looks to have finally taken the heat out of its biggest inflation worry - the housing market.

Still, the Reserve Bank of New Zealand is unlikely to let its guard down any time soon because other pockets of the economy, including a tight labour market and a booming dairy sector, are putting upward pressure on consumer prices.

That is likely to keep the central bank’s cash rate of 8.25 per cent, the highest in the industrialised world and a major draw for investors seeking high yields, at current levels well into 2008, economists say.

‘The Reserve Bank is having success in the housing arena, but the problem is that the slowdown in the housing sector is just not diffusing through to the rest of the economy,’ said Cameron Bagrie, chief economist at ANZ-National Bank.

‘Realistically, we’re going to have to see house prices fall.’ A house has long been the main investment asset for New Zealanders and so a key factor for the central bank in deciding monetary policy.

Government agency Quotable Value says residential house prices have climbed steadily for nearly 20 years, barring a slight dip in 1998.

The absence of a capital gains tax, an immigration-driven population expansion and consumer-friendly lending practices have all contributed to property prices nearly doubling between 2001 and 2007.

The property market cooled briefly last year but regained strength earlier this year, prompting the central bank to resume tightening monetary policy by lifting interest rates by a total of one percentage point.

‘The slowing housing market is core to RBNZ view of the economy slowing,’ said Shamubeel Eaqub, director of investment research at Goldman Sachs JBWere. ‘This has been a major source of inflation and activity and a major amplifier of the economic cycle. They need this housing market to slow and slow for a prolonged period of time.’

Housing data, showing median house prices levelling off and sales coming down sharply, suggest a slowdown has already begun.

The Real Estate Institute of New Zealand said annual price gains eased to 12.3 per cent in September from 12.9 per cent in August. Its figures show monthly sales have fallen for four straight months.

With lenders more risk averse following the global credit squeeze, growth in net migration easing and longer-term mortgage rates remaining elevated, many analysts think the current slowdown is here to stay.

Finance Minister Michael Cullen told Reuters in an interview last week he was also seeing appropriate signs of a slowdown in the housing market though inflation remained a concern.

The central bank forecast in September that annual house price inflation, currently around 13 per cent, would slow to around 10 per cent by the end of the year and would then continue easing through 2008. It expects prices to start falling in 2009.

The RBNZ will review its policy today, although all 17 economists in a Reuters poll predicted interest rates would remain at 8.25 per cent.

Most of the 17 economists expect the central bank to stay put at least until mid-2008 because record low unemployment, rising wages and the prospects of higher farmers’ income from the global dairy boom will provide fuel for inflation. — Reuters

Source : Business Times - 25 Oct 2007