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19-08-2007

Brash expects house prices to tumble 10%

Former Reserve Bank governor Don Brash is picking house prices could tumble by up to 10% in the next year as the already cooling New Zealand property market is further threatened by the volatile international economy.

His comments come as Westpac chief economist Brendan O'Donovan warns the global problems mean the Kiwi property market is facing a "faster, larger crunch" than previously expected.

Brash said a slump in the housing market could not be called a crash: "That would be an exaggeration. But the idea the slow-down is going to be a gentle levelling off is now looking a bit optimistic... a fall of 10% wouldn't seem too surprising."

Evidence of a cooling property market was already emerging after continuous ratcheting up of the official cash rate (OCR) by New Zealand's Reserve Bank as it attempted to rein in over-excited property buyers.

The latest Real Estate Institute figures show the national median price dropped for the second month in a row, from $350,000 in May to $345,000 last month.

Properties are also taking longer to sell, with the median days to sell reaching 31 last month up from 27 in March. And just 6660 properties sold in July, compared to 7761 sales in July last year.

But now the United States' "credit crunch" means banks previously able to buffer OCR rises by borrowing cheaply from offshore, could now face increased costs, inevitably passed on through mortgage rates.

Brash said: "Banks have a large borrowing programme offshore and if foreign investors stop investing in New Zealand dollars, the cost of money to banks will rise. Floating and fixed mortgages would go up, and that's going to be traumatic."

O'Donovan said the slump could be harder than expected. This "is the correction. This is what the Reserve Bank's been looking for... and finally it's with us".

He said a double-digit fall in prices would come only if sentiment turned "extremely sour. In 98 it dropped by 5% and (the market) wasn't as stretched then, but interest rates were higher. That is a reasonable proxy as to what might happen".

O'Donovan said "it's not a time we want to be too specific on forecasts there are extraordinary uncertainties (in the markets)".

However, "it's an ill wind that blows, and it could well be accelerating the adjustments in the economy".

O'Donovan is picking flat housing prices on average for the next year, falling in the cities but rising in the provincial areas. "When sentiment turns, it turns with vengeance," he said.

The slowdown "will be led by housing investors. That is already starting to happen. But what gives us hope that things will stay flat is strong employment and income growth," he said.

O'Donovan said commodity payouts in the first quarter of next year will provide "big economic stimulus", but they too could suffer from the international uncertainties.

"Will commodity prices stay strong or will the financial problems derail it and push them down? We believe they will stay strong, but the longer the crisis goes on, the more it will be more on a wing and a prayer."

He believed the Reserve Bank would be keeping "a wary eye... but it would be in no rush to do anything until there is real economy fallout".

He expected the OCR to remain unchanged but said the Reserve Bank would not sit "idly by" if the correction became too painful.

Economists spoken to by the Star-Times believed the Reserve Bank would be comfortable with the dollar's drop, waiting to see where it settled before reaching for its intervention tools.

Former ASB chief economist and now fxmatters managing director Anthony Byers said there was a "good chance" the international angst would "blow over".

He believed the dollar could bounce back to US75c in the next month and said the situation was a "watching game" for the Reserve Bank.

However, the international volatility meant the markets would become more "risk averse" and that was a problem for the likes of Bridgecorp, the second tier financier which collapsed last month.

Today's Star-Times Business section, which tipped the Bridgecorp collapse the day before it happened, reveals problems with another finance company, Nathans Finance. Money editor Rob Stock predicts a rise of up to 1% on mortgage rates and columnist Rod Oram says New Zealand needs to prevent an economic crash if it wants to avoid a "half a dozen or so really miserable years". Yesterday the dollar sat just below US70c, down from last month's historic high of over US81c.

SUNDAYSTARTIMES

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