NZ Herald business editor at large

The Economy Hub: Why Auckland's new house price boom is a good thing

The resurgence of Auckland house prices could be good news in the short term, with the wealth effect making home owners more likely to spend money and stimulate the economy through the dairy slump.

But the risk of increased borrowing and prices heading into bubble territory will be worrying for the Reserve Bank.

REINZ figures released this week showed the median price of the more than 3000 houses sold in the Auckland region last month surged $70,000 to $820,000, the first time it's broken $800,000.

The surge followed a three month slump that some had attributed to new government and Reserve Bank restrictions late last year.

Higher prices did lead to higher confidence among consumers and could lead to increased borrowing and spending, NZIER Economist Christina Leung told The Economy Hub.

"We do expect that household spending will remain solid and that will help to support growth over the coming year," she said.

This was the "wealth effect" where the rising value of peoples homes could make them feel more financially secure.

But it was a worry to see renewed signs of increased borrowing given New Zealanders' already high debt levels, she said.

In the medium to long term, New Zealand was moving in to increasingly precarious territory as prices continued to soar and borrowing increased, said Mark Lister from Craigs Investment Partners.

The resurgence of the Auckland market creates fresh headaches for the Reserve Bank as low inflation and the dairy slump put it under pressure to cut interest rates further, he said.

The Bank is still expected to cut rates again - most likely in June - and some are picking are picking a second cut later in the year as it seeks to head off effects of the dairy down turn and global instability.

"It's not what they'll want to see but they are unlikely to be spooked buy one month," Lister said of the new house price data.

More data due on Monday is expected to show that inflation remained low in the first quarter of the year with the ongoing oil price slump and persistently high kiwi dollar keeping a lid on the price of everything except housing.

This was putting the Reserve Bank in a difficult position as it was mandated to get inflation up but would have real concerns about the stimulatory effect of low interests on housing, Leung said.

- NZ Herald

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