New Zealand's housing market is slowing in response to record-high interest rates, leading to a decline in domestic demand, Reserve Bank Governor Alan Bollard said.
``We have recently seen signs of an easing in the housing market following interest rate increases in the first half of 2007,'' Bollard said in the Financial Stability Report released in Wellington today. ``Slower growth in housing and strong commodity prices, particularly for dairy, are expected to contribute toward a shift in the composition of growth.''
Bollard raised the official cash rate four times between March and July to a record 8.25 percent, sending home loans costs higher and crimping house sales. Just three of 16 economists surveyed by Bloomberg News expect he will cut rates before June 30 next year.
New Zealand's variable home loan interest rates average 10.6 percent, the highest since June 1998. In September, the average rate offered on a two-year fixed-interest-rate loan was 9.1 percent from about 8 percent a year earlier.
``Right across the board, rates have gone up quite significantly and lending levels have dropped,'' Bollard told reporters today. ``In addition, one or two channels of high-risk lending have been reduced and contained more centrally by the banks, and we think that's a desirable outcome.''
Reports are showing a ``sharp downturn'' in mortgage approvals, the central bank said today. Lending is moderating because of stretched valuations, continued increases in effective mortgage rates and signs of a cooling housing market, it said.
Home Sales Plunge
House sales fell 32 percent in September from a year earlier, the biggest slump in nine years, according to Real Estate Institute figures.
The financial system is sound, Bollard said. Risks to stability still remain because of low levels of savings, making households and the financial sector vulnerable to a housing market correction.
Total household debt rose 14 percent in August from a year earlier, the central bank said. Debt servicing costs rose to 14 percent of disposable income.
``Higher debt levels and rising service costs mean that some households may be exposed to a downturn in the wider economy that affects incomes or employment, or to a further sharp increase in interest rates,'' the central bank said.
Investors in rental properties may also face declining incomes as yields fall. The number of taxpayers claiming losses on property investments has increased, the central bank said. Sustaining cash flow on some properties ``could become problematic'' if economic conditions were to weaken.
Record Prices
House prices have surged 41 percent the past three years to a record and are about six times the average disposable income. The rapid increase in this ratio suggests house prices are over valued, the central bank said. The long-run average ratio is about three times.
For banks, residential mortgage lending was 45 percent of total assets at the end of August, but the central bank has noted that lending growth is slowing.
Bollard said the central bank reviewed the proportion of loans issued requiring little or no deposit and concluded the level of riskier lending wasn't excessive.
``We did make points to the banks that it was happening at a time when household debt was building up quite significantly and that we were concerned about that,'' he told reporters. ``We were questioning the extent at which some of these loan interest rate levels were sustainable as well.''
Lending growth is slowing as banks adopt more conservative risk pricing as a result of recent financial turbulence, the central bank said. The level of interest-rate discounting appears to have reduced, it said.