Cuts in interest rates lift housing market

By BRIAN FALLOW, economics editor

The Reserve Bank's interest rate cuts over the past three months have boosted activity and prices in the housing market, ASB Bank says in its latest quarterly housing confidence survey.

But we have entered a riskier stage of the housing cycle, says ASB chief economist Anthony Byett.

Turnover figures from the real estate industry and ASB's own operations showed the market to be very active, Byett said, and the historically high proportion of survey respondents expecting house prices to rise, a net 54 per cent, was consistent with a further 2.5 to 3 per cent rise in the June quarter.

The flipside of rising house prices (21 per cent over the past two years nationwide) is that although more respondents still think it is a good time to buy rather than a bad one, the gap is the smallest it has been for five years, a net 14 per cent.

"While strong migration, rising incomes and low returns from other investments are key [to] the current housing upturn, it is the lower level of interest rates that is now the major impetus."

Reserve Bank governor Alan Bollard has cut the official cash rate, which drives floating mortgage rates, by half a percentage point over the past 10 weeks and the futures market is betting on another half a point over the next few months.

Fixed mortgage rates have fallen even more. One-year fixed rates have fallen from around 7.5 per cent a year ago to 6.2 per cent.

Longer-term three- and five-year rates are driven by United States bond yields, which are expected to rise and which may move quite quickly when they do. But if at the same time Bollard was cutting local short-term rates the net effect on one- and two-year fixed mortgage rates should be broadly neutral, Byett said.

The combination of low interest rates and rising house prices is attracting speculative investor interest in the market.

"Anecdotally some investors are taking on a yield (rent-to-price ratio) of less than 5 per cent, although that is more the exception than the rule.

"More and more the market will be driven by hopeful, speculative activity and less by the fact that people just need somewhere to live.

"That represents a more risky stage of the housing cycle," he said.

He expects the present upswing in the market to run into next year.

"For now demand exceeds supply. No one is sure what the new immigration policy will mean for the number of immigrants but for the time being I am assuming there will be only a small drop [from historically high net inflows]."

The high levels of new construction pointed to more of a balance between supply and demand emerging next year, he said.