Canada shows how to cool housing

JAMES WEIR
Last updated 05:00 20/07/2012

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Floating home loan interest rates will not start to rise for a year but the Reserve Bank could still act to cool any overheating in the housing market by taking a leaf out of the Canadian book, Westpac Bank says.

The Reserve Bank would delay its first interest rate rise till July next year, Westpac Bank economists said yesterday, later than the bank's earlier expectation of the first move by March next year.

The Reserve Bank is due to review the official cash rate next Tuesday, with most economists expecting rates to be held and kept lower for longer.

When the Reserve Bank did start to move the cash rate from 2.5 per cent, rates would move fast, four times in the second half of 2013, to 3.5 per cent, Westpac said. Official interest rates would eventually hit about 5 per cent, pushing floating loan rates up 2.5 percentage points from present levels of about 5.7 per cent.

But house prices could rise another 10 per cent in the coming year given low interest rates, Westpac chief economist Dominick Stephens said.

“It is already up 6 per cent (a year) and 10 per cent is not too far off,” he said.

Houses were already over-valued, but as long as interest rates remained low and housing shortages remained, house prices would keep rising he said.

By the middle of 2013 the Reserve Bank would need to lift rates to rein in the market, he said.

The Reserve Bank has said it would not use “indirect measures” to cool the housing market such as forcing banks to shorten the term of a loan unless there was a boom.

“Is 10 per cent house price sufficient (to be a boom)? I don't know,” Stephens said, but Canada had just set a precedent the New Zealand bank could look at.

With interest rates now likely to be lower for longer, New Zealand could become the “next Canada or Norway” where housing markets are frothy but central banks have kept rates down because of low inflation and high exchange rates, Westpac said.

Concerns have been growing about a housing bubble in Canada.

Canada this month brought in changes to cut the maximum length of government-insured mortgages to 25 years from 30 years, to quell demand for new homes and curb record household borrowing. Loans in New Zealand are commonly for 25 years or 30 years but some loans were “interest only” with no set term.

There are also new rules that require Canadian borrowers to show housing costs are no more than 39 per cent of income, also making it harder for some buyers in Canada to get a home loan.

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- © Fairfax NZ News

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