Cheap loans boost market

Just when the housing market seemed to be running out of puff, it got a second wind in the last two months of 2004, adding to the risk the Reserve Bank will tighten the monetary screws further.

ASB Bank's quarterly survey of housing market sentiment last month recorded a pick-up in confidence.

More people - a net 5 per cent - now think it is a good time to buy than a bad time, reversing the position in October when a net 7 per cent thought it a bad time to buy.

Fewer respondents believe interest rates will rise in the next 12 months. Although a net 51 per cent think they will rise, that is down sharply from a net 75 per cent in October.

And a net 9 per cent expect house prices to rise over the coming year, in contrast to the previous survey when more expected them to fall.

ASB chief economist Anthony Byett said this lift in sentiment was also evident in more material ways.

Sales of dwellings jumped sharply, in seasonally adjusted terms, in November and again in December.

In November, the national median selling price posted its biggest rise since March.

November and December were record months for new bank lending on mortgages.

The banks lent an extra $2.64 billion over those two months so that, by the end of the year, their home loan books were up 15.3 per cent on a year earlier and a third larger than two years ago.

Byett said loan approvals, at least within ASB, were still running strong although not as strong as they were before Christmas.

"There is still quite a lot of interest out there in the market. It's just this general perception that interest rates are not going to get a lot worse," he said.

"That was triggered initially by the Reserve Bank back in October and reinforced by the price war."

In October, the Reserve Bank said it was confident it had done enough by way of interest rate rises to contain inflation and seemed to discount the likelihood of further rate hikes.

It has left the official cash rate unchanged since then, but its two subsequent statements have been sterner, emphasising that further increases could not be ruled out.
Despite the Reserve Bank raising official interest rates six times last year, the impact on mortgage borrowers was largely negated by a price war in the two-year fixed-rate mortgage market.

Although those special rates, which left little or no profit margin for the banks, ended before Christmas, Byett said demand for loans had continued to be surprisingly strong since then.

The market remained tight judging from the number of listings at real estate agents and the fact that the median time it took to sell a house was a relatively brisk 29 days.

But despite this lift in confidence and the signs of tightness in the market, there remained several reasons to expect the activity in the market to slow and price increases to moderate over the next year or two.

* Prices had risen faster in real terms in this cycle than in any previous housing cycle since the 1970s.

* Household debt levels, which are mainly mortgages, were now high relative to incomes.

That means that even with interest rates that remain relatively low by historical standards, the cost of servicing that debt took a bigger bite out of average disposable incomes than in the past - and was still rising.

"The Reserve Bank might have put monetary policy on hold for now, but the inflation rate is still rising and it recently warned that another cash rate hike remains a risk.

"Likewise fixed-interest rates could face some upward pressure should offshore rates rise, as expected," Byett said.

High prices make entry difficult for first-home buyers and give low investment yields on rental properties.

Meanwhile, population growth continues to slow in line with dwindling net inflows of migrants.

"And, on the supply side, consents for new housing show that building activity is no longer accelerating but remains at a high level," Byett said.

"All these things suggest there is only a limited amount this market can take off and it is more likely to keep slowing in some sort of moderate fashion."