Improvement but no housing boom in sight

New Zealand’s housing market should continue to improve throughout this year, but don’t expect a boom.

Wednesday, June 20th 2001, 2:11PM

In WestpacTrust’s latest quarterly economic review, the bank says the nation is still suffering a net outflow of migrants and the working-age population is growing at less than 1% a year, less than half the growth rate in the mid-1990s.

"Without people it’s hard for the residential building market to overheat," the bank says.

Because of relative high levels of household debt, it expects New Zealanders are likely to consume within their means and credit growth will be modest by historical standards.

It notes that even though residential building activity showed a sharp decline in the March quarter, more recent data suggests the housing market is picking up.

"Annual growth in dwelling consents has turned positive for the first time since December 1999 and in April 2001 were 12% higher than a year ago," the bank says.

Housing turnover is also rising with sales in April up 25% on a year ago. "This is the strongest annual rate of growth in sales since July 1999," it says, adding that house prices have also begun to rise.

Quite some time ago, the wholesale market gave up expecting the Reserve Bank to cut interest rates and it is now pricing in a rise in interest rates between 50 and 70 basis points over the next year. The central bank has cut its official cash rate from 6.5% to 5.75% so far this year.

But WestpacTrust says fixed rate mortgages of a year or more have bottomed but floating rate mortgages still have "some modest downside risk."

It is still expecting "at least one interest cut to come from the RBNZ in August" and perhaps another in November.

Whether those cuts occur depends on the central bank coming to the view that downward medium term inflation risks outweigh short-term inflation pressures, WestpacTrust says.

"In our view, the medium term inflation outlook has greater downside risk than the RBNZ currently judges," it says.

There’s an increasing chance the US slowdown will be prolonged, US weakness is spreading to Europe and Asia, commodity prices are falling and export volumes aren’t responding strongly to the weak New Zealand dollar

As well, because of the prolonged period of subdued asset prices, particularly house and equity prices, people have few capital gains to consume from, the bank says.

Its advice to borrowers is that whether they prefer fixed or floating rates, there’s little to be gained from waiting.

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