Hot house prices may force rate rise

JAMES WEIR
Last updated 05:00 11/03/2013

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The Reserve Bank is expected to sound another warning about rising house prices this week, and may be forced to start lifting interest rates by the end of the year, according to some economists.

The Reserve Bank is due to issue its latest Monetary Policy Statement on Thursday and was expected to hold official interest rates again at 2.5 per cent.

Westpac Bank economists said that the statement would "almost certainly" include a warning that if house prices continued to rise too rapidly, the official cash rate would need to rise earlier than previously forecast. Westpac is picking the first move up in December.

But Deutsche Bank said it was "most likely" the OCR would remain on hold for the rest of this year, with inflation still benign, a weak job market, a higher currency and a worsening drought in many parts of the country. It tipped the first move up in early 2014.

The Reserve Bank was also expected to point out that local economic activity had been stronger than expected in recent months, though inflation had been lower and the dollar higher, rising 4 per cent since December against a basket of currencies.

The drought declared in many parts of the North Island was expected to be seen as an important "downside risk", Westpac said, but may not be included in the Reserve Bank's economic projections.

Last week, the Government warned that the big dry affecting large parts of the country could cost the economy $1 billion. Primary Industries Minister Nathan Guy extended the drought area, already in place in Northland, to cover South Auckland, Waikato, Bay of Plenty and Hawke's Bay. ANZ also puts it at $1 billion and counting.

The last bad droughts of 2007 to 2009 cost $2.8b and were tipping points for the start of the last recession.

However, this year's drought has come late in the dairy season so its impact is not as bad as it could have been. Fonterra still expected to collect 1 per cent more milk this season than last season, a bank economist pointed out.

But Deutsche Bank said if there was not significant rainfall this month and next, the fall in farm production could easily wipe 0.5 per cent off national economic growth.

In December's statement, the Reserve Bank's forecasts suggested the cash rate would remain unchanged till early next year, but would rise slowly after that.

But Westpac thinks the rising house market could shift a move on interest rates to this year.

Figures out on Friday showed that nationally house prices rose 1.7 per cent over the past three months and were 6.3 per cent higher over the past year, according to QV. Auckland and Canterbury remained the hottest markets, up more than 10 per cent and 7 per cent in the past year, respectively.

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Westpac said it believed that the Reserve Bank's fears around housing would be realised.

"Given the current state of the market, house prices could easily rise 9 per cent this year on a nationwide basis," Westpac chief economist Dominick Stephens said.

That would be enough to provoke the Reserve Bank into earlier hikes for the OCR, in December, rather than early next year, he said.

The follow-up pace of rate rises in 2014 would be steeper than markets currently expected, rising to more than 4 per cent by the end of 2014.

But Deutsche Bank chief economist Darren Gibbs said there had been "little change" in the housing market in recent months and household lending appeared to have steadied at "a pace that is not alarming".

The Reserve Bank was still expected to repeat that it was watching developments in the housing market closely.

Gibbs said the Reserve Bank may use "macro prudential" tools as a first response to an excessive increase in house prices and/or household lending, provided that inflation pressures remain muted outside housing.

The Reserve Bank is consulting with the banks about the possible introduction of so-called "macro prudential" tools to help control bank lending, but they are aimed at risks building up in the banking system and keeping banks safe, not directly about controlling house prices or inflation. Fairfax NZ

- Fairfax Media

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