House price boom risk to New Zealand economic recovery: think tank
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E-mail Xinhua, May 29, 2013
Soaring house prices in New Zealand's biggest city of Auckland are threatening to derail the country's gradual economic recovery, an independent economic think- tank warned on Wednesday.
The Quarterly Predictions report of the New Zealand Institute of Economic Research said the "underlying pace" of the recovery was gradual, boosted by "one-offs," such as the rebuild of earthquake-battered Christchurch and the surrounding Canterbury region as well as a rapid growth in household borrowing.
"We expect economic growth to average 2.5 percent over the next few years. Two key risks to the outlook are high house prices and households adding to already high levels of debt," said NZIER principal economist Shamubeel Eaqub in a statement on the report.
However, Auckland house prices had risen sharply over the past year, and when house prices stretched too far from incomes, they could fall in the event of an economic shock.
In the United States and the United Kingdom, real house prices fell by 30 from their peak in the latest recession.
"Such an adjustment can have significant ramifications for the financial system, household wealth and economic activity," Eaqub said.
The Reserve Bank of New Zealand (RBNZ) 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," he said.
The RBNZ did not want raise interest rates too early because the recovery was still fragile and uneven across regions and sectors.
Higher interest rates could lower an already low inflation rate and lift the already high exchange rate, which could stifle the recovery. Endit
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