Slumping New Zealand home sales pose a “significant risk” to the economic outlook and may prompt the central bank to slow the pace of interest-rate increases even as house prices soar, the New Zealand Institute of Economic Research has warned.
The CHART OF THE DAY illustrates how changes in home-sales trends typically presage shifts in New Zealand’s economic growth by about six months. Sales plunged 20.2 percent in April from a year earlier, according to data published by the Real Estate Institute of New Zealand on May 12. The lower panel shows the nation’s house prices are above the peak reached before the global financial crisis, unlike those in the U.S, based upon the S&P/Case-Shiller 20 City Home Price Index.
“A sudden stop in house sales could make banks more careful in lending,” said NZIER principal economist Shamubeel Eaqub. “That would put the brakes on broader economic growth.”
The institute predicts economic expansion of 3.5 percent in 2014. The Reserve Bank of New Zealand imposed mortgage lending limits in October last year and raised borrowing costs twice this year to curb mounting inflation pressures. House prices in Auckland, home to a third of New Zealand’s 4.5 million people, rose 15 percent in April from a year earlier.
“In an investor-driven market, sales and prices can turn rapidly,” Eaqub said. “The RBNZ will be wary of causing a housing bust in the provinces and sectors outside of Auckland housing, which are not overheating. A pause in hikes is possible after June if the economy slows too quickly.”
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