New Zealand’s housing market is slowing in response to record-high interest rates, Reserve Bank governor Alan Bollard said, adding to signs the central bank won’t raise borrowing costs again.
‘We’re now seeing monetary policy having its impact on the housing sector in quite a significant way,’ Mr Bollard told a parliamentary committee in Wellington on Tuesday. ‘It’s having the sort of impact it needs to have.’
Mr Bollard raised the official cash rate four times between March and July to a record 8.25 per cent, sending home loans costs higher and crimping property sales. House sales fell 23 per cent in October from a year earlier, according to the Real Estate Institute.
‘The housing market is certainly going in the direction the Reserve Bank wanted,’ said Khoon Goh, senior economist at ANZ National Bank Ltd in Wellington. ‘There are a lot of upside risks to inflation, so they need to see housing slow even more.’
Just two of 16 economists surveyed by Bloomberg News say rates will rise before June 30 next year. Eleven forecast no change and three expect a cut.
Mr Bollard said pressure on food and fuel prices globally meant inflation will be near the top of the 1-3 per cent range he is required to target.
In September, he forecast consumer prices will rise 3 per cent in the year ending Dec 31.
Inflation is ‘not dead unfortunately, not even sleeping,’ he said.
Because housing is slowing, Mr Bollard can ’sit back and maintain his wait-and-see stance,’ said Mr Goh. There is nothing in recent reports to make the central bank change from a neutral stance, he said.
House prices have surged 41 per cent the past three years to a record and are about six times the average disposable income. The rapid increase in this ratio suggests house prices are overvalued, the central bank said last week. The long-run average ratio is about three times.
Mr Bollard also said demand may be abating for the New Zealand dollar from investors who borrow cheaply in yen to invest in the nation’s higher-yielding assets.
‘The pressure has moved from the New Zealand dollar to other countries, I would say particularly to the Australian dollar and the Canadian dollar, which are both under quite considerable pressure from carry trades,’ Mr Bollard said. ‘They’re the ones having a tougher time at the moment.’
The New Zealand dollar has gained 15 per cent against the US currency in the past year. Mr Bollard said he shares concerns of exporters who have said the strength and volatility of the currency has crimped earnings.
Still ‘we don’t think the strength and volatility has been as damaging as some would say,’ he said. ‘Export volumes have held up.’
The parliamentary committee is concluding an inquiry into the framework of monetary policy following concerns that Mr Bollard was raising interest rates to curb the housing market at the expense of exporters being hurt by a rising currency. — Bloomberg
Source : Business Times - 15 Nov 2007