Forecasts for housing market off with the fairies

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Wednesday 30 June 2010

Economic forecasts for robust housing market activity to appear in tandem with rising interest rates over the next two years are “off with the fairies,” according to Rodney Dickens.

By Maddy Milicich

The Reserve Bank and 10 forecasters surveyed by the NZ Institute of Economic Research (NZIER) are predicting strong growth in residential building activity over the next two years, at the same time as interest rate rises, but Dickens, managing director of Strategic Risk Analysis, says the two trends don't go together.

 "The housing market is the most interest rate sensitive part of the economy and there is no basis for expecting robust housing market activity to coexist with significant interest rate increases," Dickens says.

"It doesn't and won't happen  - the forecasters are off with the fairies."

The Reserve Bank is predicting solid growth in residential building activity over the next two March years of 24.6% and 7.4% respectively, followed by a slight fall of 0.8% in 2012/13.

But Dickens says the performance of the existing housing market is closely tied to the performance of residential building and therefore should already be showing signs of improvement.

"If residential building activity was going to grow somewhere in the ballpark of 25% in 2010/11 the number of house sales should be in the process of rising pretty strongly."

However, house sales numbers have fallen over the last nine months and stood at 5,206 for May, over 1,000 less sales compared to May last year, according to REINZ.

On top of that, Dickens says the relationship between monthly sales and the average mortgage rates tends to be negatively correlated.

"If interest rates go up significantly, existing house sales fall roughly three months later. And where REINZ house sales go, consents for new residential buildings follow four to five months later.

"Someone forgot to tell the economic forecasters that significant interest rate increases and robust growth in residential building activity are mutual exclusive outcomes."

Strategic Risk Analysis expects housing demand to remain low for the next 12 to 18 months, based on prospects for the primary drivers of the housing market, such as falling net migration and poor housing affordability.

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