Superheated house market cooling down

The booming housing markets in New Zealand and Australia, key economic drivers for the past two years, are slowing, reducing the need for higher interest rates, according to a poll by news agency Reuters.

Economists polled in both countries agree that the slowdown is happening, although more so in Australia than New Zealand.

In both countries this is leading to a dampening of consumer demand and building-related inflationary pressures.

New Zealand house prices are at record levels, but the rate of growth is slowing, and the number of sales has resumed falling after a brief surge in November and December after a home loan price war between the major banks.

The Reserve Bank raised interest rates six times last year by a total of 1.5 percentage points to 6.5 per cent, the highest in the developed world.

The delayed impact of the rate hikes and a dramatic fall in the number of immigrants over the past year, down 62 per cent in the year to January on the previous year, has taken some of the heat out of the housing market.

"Slackening migration inflows and high interest rates are starting to take their toll on demand whilst construction continues adding rapidly to the supply," said Westpac Bank senior economist Nick Tuffley.

Nine of the 10 economists polled believe prices in New Zealand are at their peak and ready to fall or are already falling, with the same number expecting housing to have about the same or reduced influence on monetary policy in the year ahead.

House prices in January were 13.5 per cent higher than a year earlier, but ASB Bank's chief economist, Anthony Byett, said that was half the growth rate of 2003 and would slow further.

"The increase will probably be around 5 per cent this year. Thus the 'house price inflation rate' has already peaked and is falling but 'house prices' are still rising."

Economists said the housing boom had been a significant part of New Zealand's stellar growth over the past three years, which has averaged between 4 and 5 per cent.

Deutsche Bank chief economist Ulf Schoefisch said strong building activity had supported growth and capital gains from higher prices had supported consumer demand.

"The housing market is clearly beyond its peak. There is little inflation risk. Monetary policy will be more concerned with the wage inflation risk," he said.

In the third quarter, gross domestic product rose 0.6 per cent on the second quarter, to 4.4 per cent higher than a year earlier compared with a 5.7 per cent gain in the year through the second quarter.

Tighter monetary policy in Australia tamed a red-hot housing market during last year, and economists expect a further gradual fall in prices this year as consumers feel the pinch from even higher interest rates.

Most economists in the poll - nine out of 10 - said house prices were falling or about to fall but the sector was becoming less of an issue in the present monetary policy-tightening cycle.

ICAP economist Michael Thomas said there was no longer the risk of a housing bubble and that the decline in house prices had been orderly.

Half - five - of the economists said developments in the housing market would have less influence over monetary policy over the next year. Three said the same and two said more.

The Reserve Bank of Australia raised interest rates last week, fearing the risk of inflation from higher wage demands in a tight labour market and from capacity constraints after a 14-year economic expansion.

The central bank raised rates in November and December 2003 to curb ballooning household debt, which was largely associated with the prolonged housing boom.

The medicine worked. Government data on Thursday showed house prices grew 2.7 per cent last year compared to nearly 20 per cent in each of the previous two years.

Credit demand for housing has also eased, although the central bank has said it remains relatively high.

"The significant rise in house prices in the past few years has contributed to households' net wealth position, contributing to a lower saving rate and faster consumption growth and overall economic growth," said Scott Haslem, chief economist at UBS Australia.

"Fading wealth effects should see more moderate growth in Australia," he said.

But the economy slowed dramatically during the second half of last year as the housing market slowed and as capacity constraints prevented exporters gaining the full benefit from strong global demand. Over 2004 economic growth was just 1.5 per cent.

- REUTERS