Banker warns on home boom

By BRIAN FALLOW economics editor

The country's top banker says people hoping to get rich on the booming house market could be in for a shock.

He said investors hoping to cash in could be left out of pocket by a "correction" in prices.

Reserve Bank Governor Alan Bollard talked down the residential property market yesterday when he announced his decision to leave official interest rates unchanged.

He said house buyers, particularly investors, could be heading for disappointment.

"Some people have expectations about returns from investment in the housing market that they probably won't realise," Dr Bollard said.

House prices are rising at their fastest pace in almost 10 years.

The boom, which was largely confined to Auckland, is now spreading throughout the country.

Prices in the year to June rose by 14.2 per cent nationally and by 15.6 per cent in Auckland.

Recent examples include a Ponsonby home which sold for $613,000 last month after going for $318,000 two years earlier, and a standard four-bedroom bungalow in Takapuna which sold for $715,000.

Dr Bollard said property investors "need to be aware that ultimately we could see a correction in prices, or the target yields they are expecting in terms of rental properties simply won't be achieved".

ASB Bank chief economist Anthony Byett said the market was more overvalued than it was in the last boom, in the mid-1990s, in terms of such measures as the ratio of house prices to incomes, household debt to incomes and rental yields.

But Mr Byett doubts Dr Bollard's warning will cut much ice with buyers.

"There is all this talk around of what you could have achieved as capital gains and it seems to have reached that investor frenzy stage, which is risky," he said.

"The market is tight - the number of properties listed for sale is falling - and money is easy to get.

"You could be pretty confident the market will remain active for another six months anyway.

"It is in his interests to talk it down - and I don't doubt he is genuine - but it is not going to have any impact."

Real Estate Institute president Graeme Woodley said he would not disagree with Dr Bollard's warning.

The boost from immigration was likely to weaken over the next year, and it would be "inappropriate" if real estate agents were raising expectations in line with capital gains achieved over the past 12 months.

Dr Bollard has cut interest rates by three-quarters of a percentage point this year, but is not foreshadowing any more cuts.

Money markets are betting that the governor will start raising rates early next year and that rates will be up a percentage point by this time next year.

But the Reserve Bank's monetary policy statement suggests a much gentler rise than that - three-quarters of a percentage point over the next two years.

Dr Bollard had little comfort for exporters, who are being squeezed by the high value of the dollar.

It is supported by official interest rates which are high in comparison to other countries.

But the Reserve Bank says cutting the rates would stimulate the property market more than it would limit further rises in the dollar.

And it could backfire on exporters if more property-related inflation required tougher action from the bank, as this could push the dollar higher.