Housing slump 'significant' economic risk

Last updated 12:00 27/05/2014

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Slumping house sales are a "significant risk" to the optimistic outlook for the economy, according to NZIER's latest forecasts.

The Reserve Bank would be wary of pushing interest rates up so far that they spark a "bust" in housing markets outside Auckland and Christchurch, the economic think-tank said today.

The New Zealand Institute of Economic Research expects the economy to grow 3.5 per cent this year.

The 20 per cent drop in house sales volumes in the past six months was a "significant risk" to growth, because house sales led economic growth by about six months.

The Reserve Bank has lifted official interest rates twice this year to 3 per cent, pushing up floating mortgage rates to a median of about 6.2 per cent, and is expected to lift rates again in June.

Further interest rate rises were likely to cool the Auckland housing market.

NZIER said a pause in interest rate rises was "possible after June, if the economy slows too quickly".

The Reserve Bank would be wary of causing a housing "bust" in the provinces and sectors outside of Auckland where house prices were not overheating.

While prices have risen close to 30 per cent in Auckland and parts of Canterbury since 2007, some other areas had seen prices drop by a similar margin.

NZIER said Auckland house prices had surged to record highs, driven by investor demand.

"In an investor-driven market, sales and prices can turn rapidly," it said

A sudden stop in house sales could make banks more careful in lending.

"That would put the brakes on broader economic growth," NZIER said.

In October last year, the Reserve Bank brought in limits on low-deposit home loans, which has seen banks cut back sharply on such lending.

For now, the expected economic growth this year was being driven by higher spending and investment by households and businesses.

The Canterbury rebuild remained a key factor, but growth was spreading to more regions, the institute said, while the impact from last year's drought was less than in 2008 and the bounceback was now boosting rural growth.

Slowing growth in China was another risk for New Zealand's economy, it said.

New Zealand sells more than 20 per cent of its exports to China which is now New Zealand's biggest export market, with rapidly rising sales especially of dairy products, pine logs and meat.

NZIER said there were also strong indirect links to China through Australia and other countries exposed to China, which might be even more important, especially for exporters outside of the dairy, meat and forestry sectors.

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