No bubble to worry about: Alexander

BNZ’s chief economist has rejected suggestions from the Finance Minister that the country’s house price inflation has become a bubble.

Thursday, April 18th 2013, 12:00AM

by The Landlord

Bill English warned last week that the rise in prices was a bubble that would inevitably eventually burst.

Tony Alexander said he was right that prices were pushing interest rates, and the Kiwi dollar, up.

“He is also correct in warning of household financial instability should there be a bursting of a housing bubble – again nothing out of the ordinary. The question however is whether this is really a bubble which we are seeing and whether it will in fact burst.”

He said house prices were being driven by a shortage of supply and an inability to address it quickly.

“This is not the same as, say, tulips, where supply eventually boomed and people one day looked in the mirror and said ‘seriously, flower bulbs as an investment?’ Housing supply cannot boom in New Zealand.”

He said the rate of growth in lending to households was rising slowly, at about 0.4% a month on a seasonally-adjusted basis.

“We are not talking about a large flock of sheep flooding into a particular paddock with capability at some unknown time to abandon it and flock to another.”

Alexander said house prices would continue to rise, as would the dollar. Interest rates would eventually go up but Alexander said the Reserve Bank would delay it as long as possible to lessen the effect on exporters.

“The housing availability and affordability crisis will get worse, social problems for those at the lower end of the socio-economic spectrum will worsen, central and local government will be forced to construct affordable accommodation and developers eventually forced to do the same for specified projects. There will be debate about a capital gains tax but it won’t be imposed unless there is a change in government and even if it was the price impact would be minimal if present at all.”

Alexander said the current situation had been made worse by people saying five years ago that prices would fall 40%. He said that stopped people from making an effort to address housing affordability, put first-home buyers off purchasing a property and slowed construction.

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