Well-fed property beast may yet feel indigestion pangs

The Reserve Bank looks at the property market and sees a King Kong-sized monster which could crush the economy if left unchecked.

The public look at the same beast and see a friendly chimp on which to take out a 30-year mortgage.

Reserve Bank Governor Alan Bollard emerged as property's Dr Evil this year, firing off interest rate salvos and tightening the policy noose. But the property beast brushed off the nine official interest rate rises since January 2004 as if they were mere pinpricks.

The public started to feel the sting of the rate rises but were powerless to resist the allure of bricks and mortar. Rather than turn their backs on the beast, they fed it and were prepared to go deep into the red to get their hands on a title deed.

Bollard spoke continually of his concerns the housing market was fuelling an unsustainable debt-financed spending spree, with homeowners spending more than they earn.

He warned the love affair with home ownership could lead to heartbreak, saying the willingness to borrow money against homes was a recipe for disaster.

It's not just spendthrift homeowners who have suffered a right telling off. Bollard also had a crack at the banks, warning they need to focus on their longer term interests, rather than short-term profits.

"The larger banks' shareholding interests, which are intrinsically linked to the health of the economy, will not be achieved if they promote loans to people who cannot afford them," he said.

While a 20 per cent deposit used to be the minimum banks would accept, many are now willing to hand out hundreds of thousands of dollars on the basis of a 5 to 10 per cent deposit. Online bank Banking Direct offers a 100 per cent mortgage.

The effort to grab market share has also squeezed banks' margins, although there has been no repeat of the mortgage war which broke out at the tail end of last year, which saw two-year fixed rates fall as low as 6.9 per cent. The big banks now offer terms of between 8.2-8.3 per cent for a two-year fixed term home loan.

Many people have been able to arm themselves against Bollard's interest rate campaign by fixing their home loan interest rates. About four-fifths of home loans are on fixed interest rate terms, which means there is a time lag before the pinch of the rate rises is felt.

Over the next year, 40 per cent of existing fixed rate mortgages are due for renewal.

Bollard admits the housing market has managed to stay "stronger for longer", with house prices about 15 per cent higher than expected this time last year.

He and the Treasury are looking at control "tools" other than interest rates, including requiring a deposit of a certain proportion.

But he remains confident the market will "correct", with prices starting to soften about this time next year.

Real Estate Institute figures show the national median house price rose to a record $300,000 in November, from $260,000 in October last year.

The AMP home affordability index, measuring prices, salaries and interest rates, shows buying property is becoming less affordable. It recorded a decline of 5.5 per cent in home affordability in the September quarter - the sixth consecutive quarterly fall.

But words of a slowdown have a familiar ring to them.

Pundits have been predicting the property market would come off the boil since the end of 2003.

Although the numbers may be starting to tot up, the emotional component of property and home ownership will continue to add an element of unpredictability to the sector.

- NZPA