It is a good wind that blows no one any ill.

Low interest rates have put more wind in the housing market's sails these days, but they are a mixed blessing.

Real Estate Institute figures out this week recorded a pick-up in both turnover and prices last month.

May is traditionally a strong month but sales were up 24 per cent on May last year, albeit still 27 per cent below the average May during the boom years of 2003 to 2007.


The median house price in Auckland hit a record $500,000, up 7.8 per cent on a year ago.

And REINZ's housing price index, which adjusts for any unusual concentration of high-end or low-end properties in any month's figures, is up 6.4 per cent on a year ago nationwide and 8.3 per cent in Auckland.

Underpinning this recovery in the market is good old-fashioned supply and demand, after a building slump in Auckland and seismic calamity in Christchurch created excess demand in both cities.

But it also reflects what are by historical standards extremely low mortgage rates.

Reserve Bank data show the weighted average mortgage rate borrowers are paying dropped below 6 per cent by the end of April, compared with 8.8 per cent when the global financial crisis hit in 2008.

Having the official cash rate at an all-time low of 2.5 per cent, and the prospect of it staying there into next year, is part of the reason.

But these historically low retail rates - the lowest since 1965 in the case of floating mortgage rates - also reflect ominously low rates for global benchmarks such as United States and German government debt.

They are a sign that in the financial markets' endless arm wrestle between fear and greed, fear has much the brawnier biceps right now.

Closer to home there are three reasons not to greet these ultra-low retail rates with a rousing rendition of the Hallelujah Chorus.

The first is the risk, given our past proclivities, of a relapse into the mentality of a housing boom.

ASB's quarterly survey of investor sentiment tells us that for the first time in two years rental property is seen as the asset which offers the best returns.

"Kiwis' enduring love affair with rental property has rekindled after 24 months in the cold," the bank's head of wealth advisory, Jonathan Beale, said.

Heaven help us if that is true.

The legacy of the last housing boom is a toxic build-up of household and foreign debt and lousy housing affordability metrics.

At the end of last year household debt stood at 143 per cent of household disposable (after-tax) income.

Granted, that is down from the peak of 153 per cent reached in 2008 and 2009, but it is still 43 per cent higher than it was at the start of the millennium and more than twice the ratio 20 years ago.

Landlords naturally resent being demonised.

They point out that they own a minority of the housing stock - albeit a rising share as owning your own home gets out of reach of more and more people.

But the prices investors are willing to pay have a disproportional effect on house prices generally, especially at the lower end of the market.

If they are the bidders the would-be owner-occupier has to outbid, they can have that effect several times before they eventually buy a property.

And if the prices they are prepared to pay are decoupled from rental yields and driven instead by the tax sheltering advantages of negative gearing and the prospect of an untaxed capital gain the distortions can be substantial and lingering.

The second reason to dread the effects of a prolonged period of ultra-low interest rates is that it undermines the badly needed rebalancing of the economy.

Rebalancing means a shift in the direction of less spending and more saving, less consumption and more investment, and less importing and more exporting.

After years of negative household saving rates, collectively spending more than our income, that elementary measure of providence has only recently moved into positive territory.

In this context it is unhelpful to have deposit interest rates falling to levels seen only twice and briefly since the 1960s.

The third reason to worry about an extended period of low interest rates is its effect on the exchange rate.

This is admittedly not the conventional wisdom.

The usual story is that lower interest rates reduce pressure on the exchange rate.

But research by a Reserve Bank economist, Chris McDonald, tells a more complex story.

Multiple forces act on the exchange rate and move it around its longer-term average.

McDonald's modelling work found that international factors, especially export commodity prices, explained more of the variation from the mean than domestic ones.

The best domestic indicator for the exchange rate is house price inflation.

"The New Zealand dollar exchange rate can be explained quite well by the movements in commodity prices, relative house price inflation and the current account since it was floated in 1985," he concludes.

The high dollar over much of the past decade has been particularly strongly correlated with high export commodity prices over this period.

"After accounting for these indicators, which are themselves important influences on relative interest rates, interest rate differentials provided little new information for explaining the exchange rate."

McDonald draws no policy implications from this work.

But it would seem to suggest that any exporters who would like to see even looser monetary policy from the Reserve Bank should be careful what they wish for.

The longer retail interest rates remain at their current low levels, the greater the risk of another outbreak of house price inflation, and that historically has been second only to commodity prices as a driver of the exchange rate.

Any temptation to think that there is some reliable mechanical lever that policymakers can operate to raise or lower the exchange rate is naive.

The potency of the various influences on it seems to vary over time.

Lately fundamental drivers seem to be trumped by a kind of bipolar disorder in global financial markets as they flip from "risk on" (confidence that Europe will muddle through) to "risk off" (conviction that its leaders are hopeless and global calamity looms).

That source of uncertainty was likely to be around for years, even a decade, Finance Minister Bill English told Parliament's finance and expenditure select committee yesterday.

He said it was important businesses contemplating investment and hiring were not paralysed by it.