Interest rate concerns keep housing quiet

By BRIAN FALLOW

Uncertainty over interest rates is keeping the housing market subdued but the prevailing mood is a lack of confidence rather than outright pessimism, ASB Bank says in its latest quarterly survey of market sentiment.

A net 28 per cent of respondents thought it was a good time to buy, down from 32 per cent three months ago and a peak of 71 per cent early last year.

The proportion who think it is a bad time to buy is relatively low at 16 per cent. The switch has mainly been from those who think it is a good time, to those who are not sure.

ASB economist Rozanna Wozniak said the number of respondents expecting interest rates to rise had remained stable but high, at a net 66 per cent.

"What's happening with the currency isn't going to help that concern."

ASB's own view is that the upside for interest rates in the medium term has reduced significantly over the past few months. "We are looking at short-term uncertainty, a risk perhaps of a reaction from the Reserve Bank if the currency continues to deteriorate, but the economy does not justify further significant and sustained rises in interest rates."

House prices, as measured by Quotable Value's index, fell 1 per cent in the June quarter nationally, and 1.2 per cent in greater Auckland (making a drop of 2.3 per cent for the year).

"The market remains in stalemate, with buyers remaining hesitant to commit and sellers unwilling to realise losses," Ms Wozniak said.

House price expectations have continued to weaken, with a net 6 per cent of respondents expecting them to rise in the 12 months, compared with 14 per cent three months ago.

Some of the fundamental imbalances in the market were coming right, Ms Wozniak said.

Oversupply was easing, with building consents down sharply (24 per cent in the latest quarter) from last year's booming levels.

The imbalance in the rental market arising from the investor-buying binge of 1996-97, which put downward pressure on rents, has also eased, she said.

While ASB sees the market remaining quiet for the rest of the year, it expects it to gain support next year as concerns about interest rates and the state of the economy gradually reduce.

"Although another small rise in the official cash rate (0.25-0.5 per cent) is still possible, we expect the first fall will occur by the end of next year, pre-empted by falls in medium and long-term interest rates," she said.

The temptation to fix mortgage rates for a long period is likely to increase over the next few quarters as three-to-five year rates edge lower, Ms Wozniak said, but over the course of a cycle consumers are expected on average to have to pay a premium to fix for a longer term.