The New Zealand Institute of Economic Research (NZIER) has forecast in its June quarter predictions that one-offs such as the Canterbury earthquake rebuild and rapid growth in household borrowing will fuel economic growth averaging 2.5% over the next few years.
"The New Zealand economy is recovering. Two key risks to the outlook are high house prices and households adding to already high levels of debt," NZIER said.
It noted the Auckland housing market's surge in was a risk for the economy.
"Auckland house prices have risen sharply over the past year. When house prices stretch too far from incomes, they may fall if there is an economic shock," the NZIER warned.
"In the USA and UK, real house prices fell by 30% peak to trough in the latest recession. Such an adjustment can have significant ramifications for the financial system, household wealth and economic activity," it said.
The NZIER said the Reserve Bank of New Zealand was worried and wanted to halt the increase in house prices.
"It intends to use macro-prudential tools to limit the supply of credit into the housing market. Because these tools are still largely untested, the RBNZ will supplement them with official cash rate increases in 2014," it said.
The NZIER NZIE said the RBNZ did not want raise interest rates too early because the recovery was still fragile and uneven across regions and sectors.
"Inflation is low and the exchange rate is high. Higher interest rates may lower inflation further and lift the exchange rate, which could stifle the recovery."
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