Further house price falls possible, says Reserve Bank

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Wednesday 10 November 2010

Housing market activity has weakened ‘considerably’ over the past year and house prices could decline further, according to the Reserve Bank’s Financial Stability Report.

By The Landlord

The report said a combination of low net migration, declining labour income, a slow recovery in house building and uncertainty about market clearing price levels have all led to muted housing activity.

"In this environment, house process could decline further," the report said.

House price adjustment has been modest, with prices falling 5% since their peak, resulting in prices remaining high relative to income.

Low rental yields from investment property also suggest overvaluation, particularly in light of recent Budget changes to the tax treatment of property investment.

The report said that against a background of rising interest rates, "a more significant adjustment is possible over the coming years, particularly if the labour market were to weaken."

Any rate rises will make it harder for some households to reduce their debt burden. According to the 2009 Household Economic Survey, around 15% of mortgage holders are particularly vulnerable, with housing costs exceeding 40% of their gross income.

With the portion of households on variable interest rate mortgages having risen over the past few years, future rate rises will feed through to debt servicing more quickly.

For households the fall in interest rates since 2008 has provided some relief, allowing some borrowers to reduce debt by using interest savings to pay off principal, however mortgagee sales as a portion of overall sales are higher than in recent years and the effective mortgage rate has increased recently, and is expected to rise further in the coming years.

The report cites a robust labour market recovery as important for the housing market, as household debt consolidates and interest rates return to more normal levels, and says that while the labour market has been volatile, employment seems to be growing modestly and the number of unemployed has fallen from its peak.

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