RBNZ assesses property risks

RBNZ assesses property risks

The Reserve Bank is reminding investors in property - rural, industrial and commercial, and residential - that property markets are inherently subject to cycles and market participants need to structure their affairs accordingly.

That's come in notes for a speech in Rotorua to the New Zealand Property Council by Reserve Bank Governor Alan Bollard.

Dr Bollard said "The property market behaves differently from the market for consumer goods ... Because supply often lags demand in the property market, there is the potential for a mismatch between the supply and demand, and this can work in both directions. When demand for property cools, due to a slowing economy, it's hard to switch off new supply in the pipeline. So a rapid rise in prices can be followed by quite significant declines later on. All property sectors tend to exhibit price cycles, with these cycles reflecting this mismatch between demand and supply."

Looking at rural property, Dr Bollard said "The ratio of rural land prices to agricultural operating surplus is now above its long run average value. However, the ratio is not yet out of line with the values that it reached in the mid 1990s. Whether there will be a downward adjustment in prices presumably depends on whether market participants also reach the conclusion that rural land is overvalued."

On commercial and industrial property, Dr Bollard said investors seemed to have learnt from the lessons of the 1980s. "An incremental approach to industrial and commercial building appears to have been adopted. Little speculative building is being done and arrangements regarding the tenancy of new buildings are often finalised before building begins."

Turning to residential property, Dr Bollard said over the last three years house prices nationwide had gone up nearly 50 per cent. "The Reserve Bank is certainly not projecting a calamitous fall in house prices over the next few years. However, some of the fundamental drivers of the housing cycle … such as rapid population growth, certainly appear to be easing, and the evidence does point to a cooling market. A reasonable view is that house prices are unlikely to rise much further over the next two years, and some falls are certainly possible, particularly in some regions."

Click on the following link to read the speech http://www.rbnz.govt.nz/speeches/0156216.html

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