10 Sep 2009

Bollard fears housing market could get out of hand

6:47 pm on 10 September 2009

New Zealand Reserve Bank Governor Alan Bollard warns an economic recovery could be derailed if the housing market gets out of hand.

Dr Bollard kept the Official Cash Rate at its historically low level of 2.5% on Thursday and urged home-buyers to think about the damage to the New Zealand economy before borrowing too much.

He says a housing boom inevitably will lead to a fall in savings and increased overseas borrowing, pumping up demand for the New Zealand dollar and undermining the growth in the economy, expected later this year.

Dr Bollard says it is important the relationship between houses and debt and the wider economy is understood, and urges buyers to think about the damage to the economy from borrowing to buy a house.

However, Prime Minister John Key says he does not expect people to consider the effects on exporters of borrowing to buy a house.

Mr Key says house purchases are made for personal reasons, and not with regard to possible effects on the economy.

BNZ chief economist Tony Alexander says New Zealanders' property obsession makes the country worse-off in the long run.

Recovery expected to be slow

The Reserve Bank believes the economic recovery will be slow and it is not ruling out further cuts in interest rates.

The central bank held the cost of borrowing on hold at 2.5% on Thursday, saying there are more signs the recession is abating and a sluggish recovery is underway.

But the bank remains wary of any pick-up. Dr Bollard said growth in household spending will be weak, while a higher dollar and subdued demand will keep pressure on firms' profits.

Dr Bollard repeated that he expects interest rates will remain at or below 2.5% until the latter part of next year.

First NZ Capital Chris Green director of economics and strategy says while he expected rates to remain on hold, it was a surprise to see the Reserve Bank not rule out further cuts.

Mr Green expects the bank's next move will be to increase interest rates any time from the middle of next year.

The Official Cash Rate was lowered to 2.5% on 30 April. It has been reduced in a series of steps since being cut from 8.25% to 8% on 24 July 2008.