Reserve Bank to lift rates as housing market cools

ROELAND VAN DEN BERGH AND GREG NINNESS
Last updated 11:59 12/03/2014

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Plunging house sale volumes will not be enough to dissuade the Reserve Bank from hiking interest rates tomorrow, which could lead to falling house prices, economists say.

House prices bounced back last month to a national median of $415,000, up from $402,000 in January, but below December's record price of $427,000, according to the latest Real Estate Institute of New Zealand figures.

The number of houses sold nationally in February fell 7.6 per cent on a year earlier as tougher lending rules force more first-home buyers out of the market. The monthly drop is the third since the Reserve Bank introduced its high loan-to-value ration (LVR) lending restrictions in October in a bid to cool the housing market.

ANZ senior economist Mark Smith said sales had fallen 10.5 per cent since October and in February were around 21 per cent below historical averages as a proportion of the housing stock, compared to a 14 per cent gap a year ago.

Westpac chief economist Dominick Stephens said it was clear that the market slowdown had been more acute than the Reserve Bank anticipated.

The slowdown was heavily concentrated in the bottom end of the market, "consistent with the idea that it is the first-home buyer part of the market that has taken the hardest knock".

But while the housing market's reaction to lending restrictions has been stronger than anticipated, the economic recovery had also outperformed the Reserve Bank's expectations.

"Inflation is surprising on the upside, GDP has been stronger than anticipated, business confidence is at a 20-year high, and the terms of trade are at a 40-year high," he said.

"So the Reserve Bank has as much reason as ever to persist with lifting the OCR [official cash rate]."

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- The Dominion Post

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