Westpac picks 4pc rise in NZ house prices

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Westpac economists are forecasting a 4 per cent rise in house prices over the coming year as the housing market stabilises due to low interest rates.

The Reserve Bank cut the benchmark Official Cash Rate to 2.5 per cent in March, and is expected to keep it at the record low until either the end of 2011 or beginning of 2012.

Along with low interest rates, banks have again begun offering mortgages with as little as a 5 per cent deposit required in a bid to fuel a flat national housing market.

Westpac is currently advertising widely its 95 per cent home loans and is also discounts on fees.

"The latest drop in interest rates will add zing to the housing market - we now expect 4 per cent house price growth this year," Westpac chief economist Dominick Stephens said in the bank's latest quarterly economic overview.

"House price growth should contribute to a slightly better consumer mood and some growth in retail sales, although nobody is talking about a return to the helter-skelter of last decade," Stephens said.

Stephens said Westpac was forecasting 1.3 per cent GDP growth in 2011 due to disruption caused by the February 22 earthquake in Christchurch.

However, outside of Canterbury the economy was displaying "surprising resilience," he said.

"Nationwide, consumer spending and house sales were actually up in March," Stephens said.

After a slow 2011, Westpac said reconstruction activity in Christchurch would help propel economic growth to 4.6 per cent in 2012.

"Construction costs could rise, and inflationary pressures could force the Reserve Bank to hike the OCR.

Rising interest rates and the higher cost of construction will crimp the economy outside of Christchurch. To some extent, we will end up with a two-speed economy, with growth concentrated in a single region," Stephens said.

Westpac expected the Reserve Bank will wait until early 2012 before beginning a series of OCR hikes.

"The OCR hikes won't start until there are cranes on the skyline in Christchurch. But once interest rates do start rising, they could rise rapidly," Stephens said.

"The exchange rate is expected to stay close to its current highs for some months, underpinned by stellar prices for New Zealand's main export commodities. Global food prices are soaring. As the world's biggest net exporter of food relative to GDP, New Zealand is well-placed to benefit," he said.

A slowdown in the Chinese economy was also a possibility for later this year, and the exchange rate could fall in that scenario, Stephens said.

- INTEREST.CO.NZ