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Interest Rates May Rise Say Property Institute

Thursday 18 November 2004

Interest Rates May Rise Say Property Institute

The Reserve Bank Governor may raise the Official Cash Rate (OCR) yet again said the New Zealand Property Institute today.

This follows the release of REINZ sales data today with the national median residential selling price reaching a new record of $252,500 in October, up from the September record of $250,000. Median prices increased in eight of eleven regions.

Institute CEO, Conor English, said today, "The Reserve Bank has increased the OCR the last five opportunities by 25 basis points and indicated that the tightening monetary cycle was complete. However we believe that a further 25 basis point increase could now be on the cards. Feedback from our members around the country has been that the housing market has been slowing. However today's stats suggest that this market has not run out of puff.

"With pressure of inflation from several quarters and the economy trucking on at a pretty good trot the Governor risks breaching his 3 percent inflation limit under the current Policy Targets Agreement (PTA). This defines price stability as annual increases in the Consumers Price Index (CPI) of between 1 and 3 per cent on average over the medium term. This now appears under pressure. The Department of Statistics Consumer Price Index (CPI) rose 2.5 per cent from the September 2003 quarter to the September 2004 quarter and GDP increased 4.4% for the year to June 2004.

While the dollar is appreciating, the recently released retail sales for the September quarter rose a seasonally adjusted 2.6 per cent. It was the highest quarterly rise in sales since the June quarter of 1997. Building consents for 31,464 new dwelling units were issued in the year ended Sept 2004, up 4 percent from the year ended September 2003. However this trend is now in retreat.

"Unemployment has fallen from 4.0 per cent in the June quarter to 3.8 per cent in the September quarter, the lowest rate since the December quarter of 1985. Along with falling immigration levels this is putting pressure on wage inflation as firms fight for labour and skills. This is giving consumers confidence that they have better job security, perhaps the best security for some years. They feel they can therefore spend more money on credit which has seen household debt level rise to record levels.

"We still believe that the residential market will soften. However with inflationary pressure from several fronts and the current intense fixed interest rate competition, which is not assisting the Governor, he may take the opportunity to raise rates again in December," Mr English concluded.


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