Reserve Bank predicts house price fall

The central bank's latest monetary policy statement says that house prices are currently sitting around 15% higher than it envisaged at this time list year.

"We expect momentum in the housing market to decline quite quickly, but see a risk of further rises in house prices before the market turns around," the bank says in outlining its "stronger-for-longer" scenario which assumes that house prices will be temporarily 10% higher than under its most likely scenario.

If the "stronger-for-longer" scenario pans out, "demand continues to remain strong over 2006 and most of 2007, bolstered by home owners converting increased housing wealth into consumption," the statement says.

That would mean stronger inflation pressures and further rate increases. "However, the housing market eventually undergoes a sharper correction, resulting in a sharper slowdown in domestic spending."

The bank notes that after moderating in late 2004, house price inflation has picked up since early 2005 and that the Real Estate Institute and Quotable Value figures are showing "surprising resilience."

It suggests that the persistence in house price inflation "may in part reflect the geographically broad-based nature of the current house price cycle. Strong house price increase are being recorded in provincial cities and rural areas and not just in the main cities," the bank says.

It also notes that household's debt-to-income ratio has continued to climb and has reached more than 140% of disposable income.

The Reserve Bank says that fixed-rate lending now accounts for almost 80% of all mortgage debt, up from less than 60% in 2000/01. It says that fixed-rate mortgages with less than two years to run until they have to be re-priced make up more than 65% of all outstanding mortgage debt.

About 40% of existing fixed mortgage debt will re-price from an existing average rate of just over 7.2% over the next year.

"On the basis of recent rate developments and the outlook for mortgage rates implied by our projections for short and long-term wholesale rates, these borrowers will face rates at least 60 to 70 basis points higher than they were previously paying," the central bank says.

That's a higher increase in average mortgage rates than it was projecting in its last statement back in September, the central bank says.