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."
20 Comments
In the last 5 years what CB has been successful in raising the OCR and its economy has survived?
It strikes me that we have huge imbalances and a tool like the OCR that acts across parts of the economy has limited impact where its really needed. Now when say all the economy is booming ie some areas are up a lot while some only are up a little raising the OCR works overall. This isnt the case today we see some specific areas booming and inflationary while we see many stagnant or shrinking (Inflation is 0.9% overall, suggsting deflation somewhere). Use a sledge hammer lke the OCR on us right now would be a disaster IMHO, To use it would be par for the course mind you, but Im hoping our RB isnt as dogmatic and blinkered as others....
In terms of inflation in Chch etc, in effect thats a one off injection of external cash into the system that will dry up....plus the underlying economy of chch is poked and big time. So sure ppls houses get rebuilt, eventually but the jobs?
regards.
An OCR rise at the moment would be like pouring a tanker of water on the small ember of recovery that we have all been blowing on for the last 4 years.
Building numbers are anaemic, exports getting thrashed with high exchange rates.
how about New Zealand as a whole gets up off its knees before we talk about slowing it all down.
why is it Australia continues to lower its OCR? arent we supoosed to be closing the gap, do we just want to make life impossible.
An OCR rate rise effects not only mortgages but also Commercial overdraft facilities and loans.
Crikey weve only got the candle going and the economists want to snuff it out.
Raising the OCR to calm Auckland House prices will punnish every home owner outside Auckland.
and if anyone can tell me how raising LVR 's are going to make houses more financially accessible to 1st Home Buyers? i'd be willing to listen.
You used to need 10% Median $400k NZ so $40k deposit and $650k Auckland say $65k now thats $80k for the rest of NZ and $130k in Auckland.
Considering the average age of a NZ first home buyer now is 36 years old, with Higher LVR they should be in a their first home by 45 ish then.........
Not quite stacked to the ceiling with gas containers as maybe get a little kindling on there first, so that the first world event beyond Our control doesnt extinguish any and all growth.
Econimists allways seem to be looking into crystal balls, why can we just wait and see some physical growth across the whole economy before we start planning what to do about slowing down our record recovery.
Do you hear any of the Economic Power Houses talking about raising interest rates?
Is New Zealand recovering too Quickly? so if you had a recovering pateint and you could see he was on the way to full recovery you would want to stiffle this?
Maybe when as a Country we dont have 3 out of 5 families getting WFF and now food for poverty stricken middle New Zealand we could deal with a real problem of prosperity and not the Invisible threat of Economist Speak.
In econ theory, low interest rate is supposed to boom investments. But hang on, investments to where -- to housing (unproductive) or to productive assets?
The answer is so obvious in NZ -- to housing. So, my conclusion is that a low interest rate will make builders happy, plumbers happy, electricians happy, gas fitters happy, painters happy, personal bankers happy, house and content, and life insurers happy.
Will low interest rate make producers happy? A little bit as they save a bit on interest repayment. But low interest rate cannot give them a high milk price, good climatic conditions. In this sense, interest rate is not even low enough to damp down exchange rate.
Stop playing the race card Xing, Kimy is right that our exporters would be directly negatively effected by a increase in the OCR. Thier borrowing costs would go higher and they would get lower returns from a high NZD.
Not everything is about Auckland houses, NZ is a export driven economy and a strong export industry means a strong NZ.
Hey man, I was talking about investments, housing, productive assets. Then, Kimy jumped out nowhere and said
"Oh yah, I forget, you must be one of those eager cashed up chinese buyers just waiting, Crouching tiger, hidden dragon waiting to pounce?
I know of at least one gold mine that has already passed to chinese ownership. Done very very quietly."
You, please tell me who play the race card?
People like you are so negative about foreign - a.k.a Chinese investments in NZ. I second this feeling because of Chinese governments deed. I am one of those who are extremely oppose to these deeds and CHN GOVT, K？
I think you are rational enough to tell that a Chinese people is not like Chinese government, right?
I celebrate Spring festival, eat dumplings, grow black hair, enjoy Yum-Cha, speak both mandarin and English, and suddenly, you bias against me. Mate, open up your eyes and mind please. I thought NZ praises for individualism.
There is a huge difference between 'xingmowang is a bad guy' and 'chinese are all bad guys'.
Hey Kimy.... why don't we just remove everything that goes up in price the inflation index... That way we can increase the money supply ...without any constraints ...at all.
Damned annoying indexes..... lets recreate them to suit our selves... As long as we make the index say that inflation is less than 2%.... then all is well..
Do u really believe what u are saying Kimy..???
Roelof, you are morally correct - but Japan has been tinkering with CPI components to save political face as far back as I can remember. Hedonic adjustments also serve a purpose that is hard to justify.
The NZIE (sic) said the RBNZ did not want raise interest rates too early because the recovery was still fragile and uneven across regions and sectors.
Nice that NZIER has direct knowledge of RBNZ thinking?
Let's hope the BOJ and Fed extend the favour to the RBNZ.
10Y (Treasury) yields rose by their most (+16.5bps or 5-sigma) since Oct 2011 to close at their highest since April 2012.
I think the world economy has actually surprised and we are moving towards a more normalised period, as long as we do not get any big shocks. The USA has some actual signs of good growth prospects for US companies in IT around the world, Shale Gas will give them good export potential and revenue and US companies have lots of cash on the side line for investments to purchase businesses overseas. In Europe Italy and Spain are in a better position this year than last year but growth will be slow for a very long time. In New Zealand I suspect with an Asia lead recovery rates will come back to more normal levels that we have seen somewhere in 7%-8% floating range. Stocks such as Mighty River Power which have had negative news may be substantially higher at the end of this year.
Stocks such as Mighty River Power which have had negative news may be substantially higher at the end of this year.
I hope you are right if you have pledged the family silver as MRP purchase price collateral - but volatility indices in the sovereign bond trading arena are not suggesting a return to what one in the past could claim as normal trading activity. Read on.
I would recommend staying clear of the bond market and go with stocks with strong balance sheet and or good dividend. However the markets are probably due a normal correction maybe sometime in June. Additionally only stick with the stock until you are happy with the gains you have made on it. In 3 years time the stock market could be substantially lower than what it is today who knows. What we do know is that housing has had a good run, the bond market is kind of bubbly and the stock markets around the world have gone up substantially since 2009 and maybe due a correction but could last another couple of years. Maybe have some cash on the sideline waiting for some value opportunities.
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