Housing market not a good look for Govt

“Treasury has already begun to talk about the impact of falling property prices while at the same time the Reserve Bank is talking about maintaining the current 8.25% official cash rate until 2009,” says REINZ president Murray Cleland.

“It might be testimony to the independence of the central bank, but for a government to be going into an election year with potentially falling property prices and rising mortgage interest rates, is not a good look.”

Cleland says the wisdom of the Reserve Bank having increased the OCR four times in a row last year, having left it unchanged for the 12 months prior, had to be called into question.

“The overwhelming goal of controlling inflation is recognised, but the cost to the average New Zealander during 2008 could be considerable, with reduced household spending as mortgage costs squeeze disposable incomes, while falling prices will leave some with negative equity and the prospect of unhappy conversations with their bank.”

ANZ chief economist Cameron Bagrie agrees the Reserve Bank is “aggressively driving a slowdown,” saying, “Bollard has hit the property hard – he was always going to win.”

Bagrie says the rising cost of credit is “one last twist of the knife” in an “already very weak” property market.

He doesn’t think house prices will fall more than 5-10% because the Reserve Bank will cut interest rates to prevent a full-scale recession.

“Bollard will have to cut rates aggressively in late 2008 because the economy is weaker than we realise,” says Bagrie. “He will need to offset the impact of the credit repricing.”

However he says if we see further distressing credit markets, “all bets are off”.