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The New Zealand economy has been recovering from recession but slumping house sales are a significant risk to an optimistic outlook for the economy, New Zealand Institute of Economic Research principal economist Shamubeel Eaqub says.
NZIER released its June quarterly predictions yesterday.
Mr Eaqub said house sales, which lead economic growth by about six months, had slumped nearly 20% in the past six months.
The NZIER expected the economy to grow by 3.5% this year, with the growth driven by increased spending and investment by households and businesses.
The Canterbury rebuild remained a prominent feature, although economic growth was broadening to more regions.
The impact from last year's drought was also less than in 2008 and was now boosting rural growth, he said.
Auckland house prices had surged to record highs, with investor demand driving the Auckland market.
''In an investor-driven market, sales and prices can turn rapidly. A sudden stop in house prices could make banks more careful in lending. This would put the brakes on broader economic growth.''
Slowing growth in China was another risk, Mr Eaqub said. New Zealand sent more than 20% of its exports to China.
The indirect links through Australia and other countries exposed to China might be even more important, particularly for exporters outside dairy, meat and forestry.
The Reserve Bank had been raising interest rates and was expected to do so next month, followed by a pause if the economy slowed too quickly, he said.
Further rises were likely to cool the Auckland housing market.
''The Reserve Bank will be wary of causing a housing bust in the provinces and sectors outside of Auckland which are not overheating,'' Mr Eaqub said.