Despite the huff and puff, property market refused to blow down

By Kate Perry of NZPA

Thursday 30th December 2004

New Zealanders' love affair with bricks and mortar was supposed to come to a sticky end in 2004, amid predictions the property boom was set to bust.

But New Zealanders continued to pour money into property as the economy kept going gangbusters and banks scrapped it out to offer the lowest home loan interest rates.

Real Estate Institute of New Zealand (REINZ) figures showed median house prices rose eight out of the past 11 months, hitting a record high in November.

Median house prices hit a high of $260,000 in November, up from the October median of $252,500 and $235,000 in November last year.

But despite buoyant prices there were some signs the market was easing towards the year-end with sales slipping compared to the year earlier and houses taking longer to sell.

Sales rose from 8191 in October to 9502 in November, but were down from 10,722 the previous November.

The median number of days it took to sell property in both October and November was 30 days, up from 24 days in November last year.

Despite this BNZ chief economist Tony Alexander said in his pre-Christmas weekly overview the sector was ending the year in relatively good heart.

"Sure, sales are running around 23% down from a year ago and it is taking slightly longer to sell a dwelling than a year ago. But confidence in the market overall seems quite healthy with prices plateauing at worst and, apart from Nelson, still generally rising in most parts of the country," he said.

One of the main reasons the property market had been tipped to dip this year was a decline in the number of new immigrants.

Increased demand for property caused by rising immigration numbers had been a major driver behind the buoyant housing market in the previous couple of years.

The number of new immigrants coming to New Zealand has plummeted according to data from Statistics New Zealand.

In the year ended November there was a net permanent and long term migration gain of just 16,300, down 56% on the net inflow of 36,800 people the previous November year.

But the dropping numbers of new New Zealanders seeking housing has so far been mostly offset by the flow-on effects of a booming economy - which defied expectations and sped up despite oft repeated predictions of a slowdown.

Data released in December showed the economy grew 0.6% in the September quarter, while the growth rate in the September year was 4.6%, up from 4.4% in the June year and 3.7% in the September 2003 year.

The annual growth rate was the strongest since December 2002 .

Reserve Bank governor Alan Bollard said the economy continued to surprise on the upside and projected the economy would expand by 5.2% in calendar 2004 - much stronger than the 4.65% the bank forecast in September.

But he expected to see an economic downturn in 2005.

GDP growth was projected to slow to 4.75% by the March 2005 year and then to 2% the following year.

Apart from the economic growth, another driving factor keeping the needle from popping the property bubble was the unexpectedly aggressive `home loan' war between the country's major banks at the end of the year.

From October retail banks defiantly pushed down home loan interest rates despite the best efforts of the Reserve Bank.

In a bid to take some of the heat out of the property fire Reserve Bank governor Alan Bollard raised the official cash rate (OCR) six times this year, from 5% at the beginning of the year, to 6.5% by December.

Changes to the OCR are felt relatively quickly in floating mortgage rates, but lenders are protected by fixed interest rates until the term of their mortgage expires and they have to re-price. New Zealanders' preference for fixed interest rates rather than floating rates muted the flow on effect of OCR hikes on home loan rates.

Reserve Bank figures show around 30% of fixed rate loans were due to come to term within the next year, while more than 50% were due to re-price within the next two years.

The last OCR hike was in October, when it rose from 6.25% to 6.50%. The rate rise was expected, but it was Dr Bollard's accompanying comments that caught the market's attention. His comments were seen as dovish and were taken as an indication the tightening cycle was over.

This was all the prompting banks needed to embark on the unanticipated `home loan war', as they battled for a piece of the property market pie.

The Bank of New Zealand (BNZ) led the charge, with its `Unbeatable' campaign, and within the month its two-year fixed loan rate had fallen from 7.4% to 6.9% - barely hovering above the OCR of 6.5%. Most other major banks followed suit with margin-squeezingly low rates.

The low rates stimulated the property market and helped fend off the much anticipated downturn. But the good times might not last much longer. Bollard kept the OCR unchanged in December, but his comments were decidedly more hawkish in tone. Instead of a pattern of gradual rate relief starting next year, Bollard stressed a further rate hike could not be ruled out.

His tone, combined with the sheer unsustainability of the tight interest rate margins saw the banks call a Christmas cease fire in the home loan war. Most major banks have now lifted their two-year rates up to 7.6% to 7.7%.

BNZ's Alexander said he expected to see housing activity ease during 2005.

Prices were likely to ease between 5% and 10% over the year, he said.

But he said a number of factors would help insulate the market - including the strong labour market providing job security, retiring baby boomers looking for investments and a general pool of wealth which has built up over five years of strong economic growth.

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