Supply shortage driving NZ housing prices

In sharp contrast to, and also in part because of, the woes facing the property development sector in New Zealand, house prices are expected to rise by 11 per cent in the coming year and rise by as much as 24 per cent over the next three years, according to a report released earlier in the week by QBE LMI.

However, it can be safely said if massive problems now emerge in New Zealand's finance company sector, then any rise in house prices might be much more subdued. Such an outcome, although very much unwanted, may also allow the Reserve Bank of New Zealand to avoid a massive headache.

Infometrics prepared the report for QBE LMI and said that it was low interest rates combined with a shortage of new housing that will drive the growth in house prices. The report notes that house sales' volumes increased by 41 per cent over the June quarter, as a result of recent declines in mortgage rates.  The shortage of supply is attributed to a lack of finance for developers and strong migration levels.

Only a couple of weeks ago the RBNZ was threatening to further reduce the official cash rate to take the pressure off a rising New Zealand dollar that was threatening to stifle exports and with it, any prospect for an economic recovery. The problem with further reducing interest rates is that it would simply add to the pressure in the housing market, assuming the cuts would be reflected in mortgage rates, which can no longer be guaranteed.

As it is now, if the finance company sector is about to find itself in severe difficulty then further cuts to the OCR are unlikely to add too much pressure to the housing sector. Pressure on the sector could also be reduced by a temporary cut in immigration levels.