Falling house prices good news for Reserve Bank

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Falling house prices good news for Reserve Bank

The boom in house prices of the last five years is all but over, according to Gareth Kiernan, senior economist at Infometrics. Mr Kiernan pointed to Quotable Value’s house price indices for the June quarter as evidence that the market has cooled significantly. Over one-third of local council areas experienced price falls over the June quarter, and the nationwide increase in house prices was just 1%. Both figures were the weakest since 2001.

“The extended period of higher interest rates, combined with the effect of last year’s high dollar on export incomes, is now having an impact on property prices in provincial areas,” said Mr Kiernan. “Kaikoura and Mackenzie are now experiencing annual price declines, with other provincial areas such as Otorohanga and Westland at risk of the same fate.” Infometrics’ latest building and property forecasts show nationwide house price inflation slowing to below 2.5%pa by September 2007.

The latest house price data gives the Reserve Bank some breathing space ahead of tomorrow’s official cash rate review. Although much attention has centred on the strong measure of capacity utilisation, other economic indicators published since the Bank’s last interest rate review have not been especially strong. The effect of a cooling real estate market on household spending will reassure the Bank that its monetary policy “pipeline” is gradually working.

“The Reserve Bank is likely to leave interest rates unchanged, but maintain a hawkish tone in its statement,” said Mr Kiernan. Infometrics expects economic growth to accelerate to above 2.5%pa by the second half of 2007 – a rate that is still sufficiently slow to ease inflationary pressures further over the next year. In line with their economic projections, which are at the bullish end of the spectrum, Infometrics predicts that the Reserve Bank will not start to lower the official cash rate before December 2007.

ENDS

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