KEY POINTS:
The housing market will continue to fall until the end of the year, Reserve Bank Governor Alan Bollard told MPs today.
Speaking to Parliament's finance select committee after cutting interest rates by 50 points, Dr Bollard said the bank's latest forecasts for the housing market matched his predictions for the economy going through a shorter, deeper trough.
Dr Bollard said he expected house prices to fall by 15 per cent - 25 per cent in real terms - by the beginning of next year and then the market would begin to improve.
The housing market had fallen by about half that much so far, he said.
This was the biggest drop in prices since the 1970s, but just represented a necessary correction.
The housing market would come out of its trough when the economy started improving in the last quarter of this year, Dr Bollard predicted.
He did not believe that New Zealand was facing a crisis in the mortgage market like that being faced in the United States.
In the US a 25 per cent fall in housing prices matched by a credit crunch had seen a large increase in mortgage sales and people walking away from homes they could no longer afford.
Dr Bollard said New Zealand was not suffering from similar problems, largely caused by the US sub-prime mortgage lending.
The housing recovery in New Zealand would be gradual and reflect an increase in prices and sales, and a drop in the days required to sell.
The wider economy had probably experienced three-quarters of moderate recession, but Dr Bollard believed it would bounce back next year into mild growth.
The state of the world economy remained one of the biggest risks to New Zealand.
A drop in mortgage rates would start to flow through to more households next year, but credit conditions would remain tight.
Tax cuts and the bounce back from drought would also help fuel some growth.
Political reaction to Dr Bollard's move was generally positive.
Finance Minister Michael Cullen said the move would put greater downward pressure on retail interest rates.
"The implications are that this will help rebalance the New Zealand economy. I think Dr Bollard's satisfied that the inflation rate is going to be coming down over the next year otherwise he wouldn't have moved those 50 basis points," Dr Cullen said.
He was confident the economy would start picking up soon.
National Leader John Key said the cut was good news since the economic recession was biting deeper.
"It comes on the back of the worst real estate numbers for 26 years and I think it also reflects the very dark clouds that have been looming over the international financial markets, Mr Key said.
- NZPA
