Rising home prices will increase the pressure on the Reserve Bank of New Zealand 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 yesterday in an interview broadcast on Television New Zealand’s Q+A.
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,” English said. 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.
Wheeler can delay a rate rise until December because the strong currency and global conditions are curbing inflation, Robin Clements, chief New Zealand economist at UBS AG, said in a research note today. He previously forecast a quarter point rate rise in September.
Six of 15 economists surveyed by Bloomberg News in mid-April forecast a rate rise this year. Nine saw no change.
The central bank may need to raise its interest rates if rising house prices and household borrowing fan inflation, the International Monetary Fund said this month. Rising house prices off an already elevated level were a growing concern, the Washington-based fund said May 15 in its annual economic assessment of New Zealand. The nation’s economy will grow about 2.25 percent this year in the face of headwinds from a strong currency, a drought and government spending cuts, the IMF forecast.
House prices gained 9.8 percent from a year earlier in April, the biggest annual rise since 2007, according to an index published May 13 by the Real Estate Institute of New Zealand Inc., prompting Governor Wheeler to urge banks to limit risky home lending.
“The steps the government has taken over the last week with the Reserve Bank tool kit and the accords with councils are going to change the market over the next two or three years, and it’s going to bring more houses to the market,” English said.