Sam Stubbs: Christchurch rebuild could give house market a boost

Opinion

The effects of Christchurch's tragic earthquake last month continue to reverberate throughout New Zealand's society and economy.

On the economic front, there has been a significant decision by the Reserve Bank of New Zealand to cut the official cash rate from 3 per cent to 2.5 per cent. The cut will help the economy in the short run.

New Zealand was struggling with shallow recession before the quake struck and the disaster should knock another 1.5 per cent or so off our gross domestic product this year.

However, the Reserve Bank's rate cut will have positive effects on mortgage rates.

Residential property affordability has improved thanks to cheaper mortgage rates. The current situation offers a chance to get a foothold on the property ladder and has reduced downside risk from further housing-market decline for homeowners.

This suggests that now is a good time to buy a residential property because inflation - officially at 4 per cent - will most likely gather momentum as the rebuilding of Christchurch gets under way.

Costs in the construction sector should rise from higher wages and prices for materials, and labour scarcity. All those builders, plumbers and sparkies tripping over the ditch to receive big pay packets will be sorely missed.

It will be a classic case of demand exceeding supply.

It has been assumed that the rebuild of Christchurch will be spread out across years and such a long timespan that the inflationary impact of this vast project will be diluted. I'm not so sure.

Some construction will need to happen in a hurry, such as rebuilding commercial property. The insurance policies of many commercial property landlords will only cover their earthquake-related losses for two years at the most. After that owners won't be covered for loss of rents, so they will want to get tenants into buildings quickly.

Christchurch's looming construction bottleneck should trigger inflationary pressures the Reserve Bank will struggle to contain. Property sector inflation means house prices will go up, because the cost of building is closely related to prices achieved in the real estate market.

* Sam Stubbs is CEO of Tower Investments