No 'circuit-breaker' expected till 2018

New Zealand's "red hot'' housing market appears set to continue for another year with Westpac analysts pushing out house-price inflation expectations for the year from 10.5% to 14.2%.

Westpac chief economist Dominick Stephens has raised a caution over the country's increasing "borrow-and-spend'' dynamic, being fuelled by the escalating house prices.

He said yesterday in a monthly housing report the residential market was still "red hot'', noting the Real Estate Institute of New Zealand's house price index was up almost 7% during the past three months - the fastest three-month gain since 2005.

Separate recent data from REINZ and Quotable Value show house prices and home values well above the previous October 2007 peak, the majority in double-digit percentage growth.

Mr Stephens said while a sharp lift in interest rates had been "the circuit-breaker'' to rising prices in the past decade, he did not expect a repeat of that "any time soon''.

"This self-reinforcing cycle tends to continue until a circuit-breaker comes along to end the party.

"In fact, we can see no circuit-breaker at all over the coming year or so, which is why we are forecasting such strong house-price inflation over that period,'' he said.

He said May's house-price inflation prediction for the year was "bullish'' at 10.5%, but the most recent strong housing data prompted a revision yesterday to 14.2%, which includes an allowance for more Reserve Bank restrictions on mortgage lending.

He said Realestate.co was reporting an "extraordinarily low level of inventory available for sale'' and that house sales were running at their strongest pace since early 2007.

Mr Stephens' assessment was that the record low interest rates were the key driver of the market at present, being the common factor explaining why house prices were rising across almost the entire country while rents were increasing only slowly.

"Low interest rates also help explain why share prices and commercial property prices are rising at the same time as house prices,'' he said.

He warned that the rising house prices had sparked a strong "borrow-and-spend'' dynamic across the economy, where home owners tended to spend some of their increased wealth.

However, house buyers had to borrow more, and were able to do so because of the low interest rates.

"The net effect is that the nation borrows and spends,'' Mr Stephens said.

He said this scenario was a "familiar dynamic'' for the economy.

The rising house prices and a borrow-and-spend environment could then spark a lift in residential construction activity and consumer spending, which meant more jobs, and ultimately more confidence to bid house prices even higher.

Mr Stephens believed the circuit-breaker to that cycle would come later in the decade.

He expected the wind-down of the Canterbury rebuild and a reduction in net migration would lead to a slowdown in economic growth and a rise in unemployment around 2018.

"That may be enough to knock confidence in the housing market and reverse the borrow-and-spend dynamic,'' Mr Stephens said.

He said more borrowing restrictions by the Reserve Bank might slow the market for a time "but are unlikely to constitute a circuit-breaker''.

simon.hartley@odt.co.nz

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