State of the economy: Kiwis riding the property boom

After going sideways for about four years, house prices on average rose about 47 per cent over 2002-04 and are still going up.

The number of sales peaked in late 2003 but after falling steadily for most of last year got a second wind from a mortgage rate price war among the banks towards the end of the year.

Several factors have been driving the boom.

One is that the move to a low inflation economy over the past 17 years has led to a structural shift down in interest rates generally, compared with the last boom in the mid-1990s. So a larger mortgage can be serviced from the same income.

Secondly, incomes have been rising - around 7 per cent over the past year - as a result of more jobs and higher wages. And people feel more secure in their jobs as a result of the tightest labour market in a generation.

Even so, ballooning mortgage debt means the interest bill is taking a bigger bite out of incomes than it has for many years, leaving at least some people vulnerable if interest rates keep climbing.

There was also a boost from net migration, influenced by returning expatriates and fewer new New Zealanders leaving.

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