Interest rates blamed for fuelling house price rises

CATHERINE HARRIS
Last updated 05:00 18/02/2013

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House prices might be rising, but the reason is not a shortage of supply, an economist says.

Westpac economist Dominick Stephens says the growing gulf between house prices and rents shows financial factors, not housing supply, are driving prices.

According to the "house price-to-rent ratio", it takes about 30 years of rent to buy a median house, and that figure is rising.

Stephens says that where there are clear housing shortages, both rents and prices should shoot skywards. This is happening in Christchurch and Auckland, but elsewhere, rents are falling far behind, indicating that speculation or other factors are at play.

"Our finger is pointed firmly at low interest rates."

In 2002, just before the housing boom, houses were selling for the equivalent of 18 years of rent, but by the middle of 2007, that ratio had blown out to 33 years.

Most analysts expect house prices to rise around 7 per cent this year. The volume of house sales has also turned around. Sales last month were up at least 10 per cent in all regions except Taranaki.

"The implication of all this is that house prices will keep rising so long as interest rates remain low - but they could fall again when interest rates rise," Stephens says.

Even if house values are rising, it will take time for that to filter down to rents, adds Massey University property expert Bob Hargreaves.

He says rents are generally constrained by wage growth.

Landlords are often dealing with people with accommodation supplements or low incomes and they are "very conscious that if they charge too much they get people moving out".

Westpac data shows rental yields halved between 2003 and 2007, but investors shrugged these off because of strong capital gains and tax advantages.

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- BusinessDay.co.nz

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