KEY POINTS:
The housing market could be in for a hard landing because of the global credit crunch and its effects on New Zealand banks' funding costs, Reserve Bank Governor Alan Bollard says.
In remarks to a gathering of central bankers in Paris last night, he reflected on the implications of the "new era" financial markets seem to be moving into for a net borrower like New Zealand.
One is the increasing funding costs banks face and consequently the mortgage rates they charge.
"This occurs at a time when New Zealand's housing market is already slowing due to the effects of past policy tightening," Dr Bollard said.
"While we are projecting the housing slowdown to be of the soft-landing variety, there is obviously some risk of a more pronounced slowdown.
"History shows us that either scenario can happen."
Banks needed to be able to cope not only with the sharp change in the cost of funds overseas but, "as we saw in July last year, we also need to confront the possibility that global funds may not always be as readily available as we perhaps used to think".
Dr Bollard also referred to the "collateral damage" to exporters and import-competing firms arising from the willingness of both retail investors and hedge funds to take the risk of investing in New Zealand dollar-denominated securities even when the dollar was already high.
"Despite increased global risk aversion, it is not yet evident that the carry trade is dead. We have still seen a relatively strong issuance in the New Zealand dollar in recent months via uridashi bonds, for example.
"The role that hedge funds can play at the stage where an over-valued exchange rate begins to adjust back to a more normal level is also unclear. Whether hedge funds assist the adjustment process or whether they make it more abrupt and costly is debatable."
