Treasury is warning that both annual growth in house sales and prices will be declining sooner than previously thought.
In a special report released yesterday, Treasury economists said they expected house prices to moderate in the near term and residential investment levels to fall by the end of the year.
‘‘Once we consider further increases in lending rates, a declining trend in dwelling consents and recent falls in net migration inflows, we see residential investment falling further than previously expected in the short term.
‘‘As house price growth moderates, the growth in potential collateral also eases, making it more difficult for borrowers to continue accessing new funds.''
The link between house prices and private consumption was also strong, Treasury said.
In the last few years, an increase in consumption had followed rising house prices.
Homeowners felt wealthier, due to high prices and extracted some of the equity from their homes for spending on goods and services.
As house prices began to correct, Treasury expected to see less equity withdrawal and a lower profile for spending growth, as households consolidated.
Sales of durable goods, such as whiteware and furniture, could also be expected to fall.
Treasury said there were two drivers of the slow down in the market for existing homes - higher borrowing costs for households and weaker net migration.
Four successive increases in the official cash rate by the Reserve Bank last year had slowed momentum in the housing market as the demand for existing houses waned.
The effect of current international developments was also an important influence on borrowing costs.
‘‘Financial markets have been been in a state of turmoil following the fallout from the ‘subprime' crisis in the United States. Banks are tightening lending criteria and rates are increasing, despite no increases in the OCR since July 2007.''
The effective mortgage rate (the average rate for the pool of borrowers) continued to increase as borrowers rolled over fixedterm loans at higher interest rate, Treasury said.
The effective rate was 8.5%, 0.5% above last year's rate. That would continue to increase as fixed rate mortgages were reset. More than a quarter of all home loans were due for repricing in the next year.
Lower net migration was compounding lower housing demand. For the 12 months to January, arrivals exceeded departures by just 4800 people after falling from 14,100 a year ago.
The tight labour market was offsetting that to some degree. but on its own was unlikely to support current prices of homes.
Interest.co.nz reported yesterday the Bank of New Zealand had joined other major lenders in lifting its mortgage lending rates. The BNZ also offered a two-year special term deposit rate of 9.09%, the first of the big banks to offer a term deposit rate of more 9%. Kiwibank has a one-year special rate at 9%.
