Bollard warns of housing cooling

By BRIAN FALLOW


House prices are unlikely to rise much further over the next two years and price falls are possible in some regions, Reserve Bank Governor Alan Bollard says.

"The Reserve Bank is certainly not projecting a calamitous fall in house prices over the next few years," he told the Property Council of New Zealand conference in Rotorua yesterday.

But some of the fundamental drivers of the housing boom, such as rapid population growth, were easing, pointing to a cooling market.

Overall, the household sector's balance sheet had strengthened, with its net wealth increasing $85 billion between 2001 and 2003, even with a $23 billion increase in debt.

Even so, Bollard stood by the warnings he sounded last year that some borrowers, and in particular some investors, were vulnerable to a significant fall in house prices and rentals or a significant rise in interest rates.

Bollard is expected to increase interest rates again next week, for the fifth time this year.

"Markets can get out of kilter ... As I have said before at the margin this may have been the case in parts of the housing market over the past two years, with some investors becoming unrealistic about prospective returns. There are, no doubt, examples of overzealous investors in the commercial and rural property markets too."

Bollard said it was not hard to see why the property sector had fared well in recent years.

During the past five years, the economy had expanded by about 20 per cent. Retail sales had grown 25 per cent in real terms. Export volumes had risen by nearly a third.

Net immigration had added 67,000 to the population, not counting foreign students and those here on work permits.

The number of people employed had increased by about 220,000 and there were 40,000 more businesses operating.

Bollard said the Reserve Bank agreed with other observers that the resulting upswing in the housing market had now peaked and that demand was beginning to cool.

"House sales, which are a good barometer of demand and a good leading indicator of future building activity, have edged down over 2004. The number of new building consents issued, though fairly volatile, appears to be easing after rapid growth in 2002 and 2003.

"We're also seeing some cooling in the rate of growth in credit extended for housing purposes."