RBNZ: House prices may drift lower

The Reserve Bank of New Zealand says house prices in New Zealand still seem elevated relative to incomes and rents, and has warned it is monitoring banks as they increase loan to value ratios in the face of elevated prices.

The comments came in the Reserve Bank's twice-yearly Financial Stability Report released today, in which it said house prices may drift lower if enough buyers were unwilling to pay currently high asking prices.

Nominal house prices had only fallen 5 per cent from their peak in late 2007, or 13 per cent in real terms, the RBNZ said.

"While prices have not fallen far, housing market activity has been particularly weak over the past 18 months," it said.

Tax changes, low confidence, low net migration and sellers' unwillingness to accept lower prices had all contributed to slower housing market activity, the RBNZ said.

"There are few signs of an excess in dwellings (with construction weak in recent years), particularly given the earthquake-related damage in Christchurch. Some recent data has also suggested Auckland house sales and rents are strengthening," it said.

"However, given that prices appear elevated relative to historical relationships with incomes and rents, prices may yet drift lower, particularly in real terms, for example if enough buyers are unwilling to pay current prices and prefer to rent while sellers' expectations adjust," the RBNZ said.

Any further negative news could cause a sharper downturn in the housing market, particularly if the labour market were to weaken sharply, or if interest rates were to rise rapidly, the RBNZ said.

Economists are expecting the Reserve Bank will next raise the Official Cash Rate in either December this year or March 2012, after the bank cut the OCR to 2.5 per cent earlier this year as an 'insurance policy' for the New Zealand economy following the devastating February 22 earthquake in Christchurch.

Meanwhile, in light of seemingly elevated house prices, the Reserve Bank warned it was monitoring banks as they increased loan-to-value ratios in bids to draw customers to the subdued housing market.

Tight lending conditions appeared to have begun to ease, the RBNZ said, adding there had been a material easing in lending standards in corporate lending as banks competed for business.

"Some banks have also increased maximum loan-to-value ratio requirements for home buyers," the RBNZ said.

"The Reserve Bank will continue to monitor this lending, especially since house prices seem to remain elevated," it said.

Article published courtesy of Interest.co.nz

Source: The New Zealand Herald - Interest.co.nz

Posted: 13 May 2011

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