House bubble not big enough to burst - yet

Reserve Bank governor Alan Bollard says that he would be prepared to raise interest rates to prevent a housing price bubble but says that would only happen in rare circumstances.

Monday, February 2nd 2004, 9:05AM

by Jenny Ruth

Speaking to the Canterbury Employers’ Chamber of Commerce on Friday, Bollard said the recent boom in the housing market isn’t sufficiently overheated to warrant "such a severe intervention".

Thursday’s interest rate hike "was just part of the normal operation of monetary policy to ensure continuing consumer price stability," Bollard said. But housing is currently still the biggest element in the day-to-day controlling of consumer price inflation.

Housing demand can shift dramatically in a short space of time and it takes time to build new houses so house prices are prone to significant short term movements, Bollard says, noting the close correlation between net migration inflows and house prices.

"The price signals given by the housing market thus have to be treated with caution," he says, noting that aggregated house price statistics are "noisy" indicators and that data on house prices isn't always of high quality.

"There is no doubt that we have seen quite strong increases in house prices in New Zealand in the last year or so. Some of that is justified by fundamentals, some simply reflects the fact that, in a small economy with a small housing stock, it does not take much increase in demand to have a big effect on house prices. But some of the recent increases may also reflect excessive exuberance among some investors."

Some people may be incorrectly convincing themselves that house prices only rise and that someone else can always be found to pay an even higher price.

"For a time, this behaviour can be price reinforcing, but eventually some unhappy soul will be stuck holding the bag," Bollard says.

But while there are elements of speculative bubble behaviour in the housing market which bodes ill for some individuals, at this stage it doesn’t seem sufficient to generate significant fallout for the overall economy, he says.

In any case, a bubble in residential property is less of a concern than a bubble in commercial property or in the stock market because banks’ residential mortgage portfolios are much more stable than other types of loans.

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House bubble not big enough to burst - yet

Reserve Bank governor Alan Bollard says that he would be prepared to raise interest rates to prevent a housing price bubble but says that would only happen in rare circumstances.

Monday, February 2nd 2004, 9:05AM

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