New Zealand’s rising house prices will increase the pressure on the central bank to raise interest rates, Finance Minister Bill English said.
“These households heading into quite high debt to buy highly priced houses need to be aware at some stage the RBNZ will increase interest rates, particularly if the housing market keeps growing at rapid rates,” English said in an interview broadcast on Television New Zealand’s Q&A today.
Low interest rates have helped fuel demand for property, raising prices at the fastest pace since 2007 and prompting the central bank to signal its concern about the risks if the housing bubble bursts. Central bank Governor Graeme Wheeler is reluctant to increase the official cash rate from a record 2.5 percent because it may boost demand for the currency.
“I’m just stating the fact that interest rates are likely to rise at some stage,” said English. Home-loan interest rates are at 50-year lows and borrowers “don’t want to believe that’s permanent,” he said.
The government doesn’t want borrowing costs to go as high as they did in the previous housing boom in 2006-07 when the cash rate climbed to as much as 8.25 percent, English said. Last week it agreed with the central bank on new tools to potentially curb lending, and also announced plans to increase the supply of housing to ease pressure on prices.
“Rather than rely on the interest rate tool, which is what was used last time around, we’ve spent the last two or three years working out what the tool kit is that we need to beat the housing cycle,” he said.