Price of houses will drop, says Reserve Bank head

Reserve Bank Governor Alan Bollard. Picture / Mark Mitchell

Reserve Bank Governor Alan Bollard expects house prices to start falling by the end of the year as higher interest rates begin to bite.

"We are seeing the rate of increase slowing a lot," Dr Bollard said in Basel, Switzerland, where he is attending a meeting of central bankers.

By the end of the year the bank expected house prices to "go negative".

His remarks come after an OECD survey found New Zealand's residential property market was one of the world's most risky and second only to Denmark in the likelihood of a serious price correction.

The organisation studied 17 countries and found New Zealand one of the most hazardous markets.

With more fixed mortgages coming up for renewal and interest rates rising worldwide, Dr Bollard said, the property market was starting to cool.

House prices in May rose 12.4 per cent from a year earlier, the slowest annual pace in 14 months.

"It takes longer for houses to come to market and longer for them to sell," Dr Bollard said. "Monetary policy is now having an effect and we feel more comfortable as a result of that."

The Reserve Bank raised borrowing costs nine times between January 2004 and December last year, taking its key lending rate to a record 7.25 per cent.

Most economists do not expect it to increase rates further this year.

Dr Bollard said the lending rate increases were driven by the booming property market, which fuelled inflation by boosting household wealth and consumption.

New Zealanders were wrong to think they could "overwhelmingly save through housing".

The OECD report found that New Zealand house prices increased 69 per cent between 2000 and 2005.

But there are signs that the bank's interest rate policy is having an effect.

The latest Real Estate Institute data showed national sales volumes down 17 per cent between May 2003 and last month.

Auckland volumes dropped 46 per cent from 4078 sales in May 2003 to 2981 sales last month.


Real Estate institute president Howard Morley said the property market was in positive territory and was likely to remain there.

Economists had been predicting the demise of the market for four years but it still performed strongly.

Mr Morley said a recent survey of property investors showed that 90 per cent intended to increase their holdings over the next five years.

"This has shown real estate has been one of the better investments."

- BLOOMBERG