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05-06-2008

House prices may fall 13 per cent - Bollard

NZ Herald

While mortgage interest rates may be coming down soon, house prices are also heading south, says Reserve Bank Governor Alan Bollard.

"From their peak in 2007, nominal house prices are assumed to fall by about 13 per cent," he said. This compared with a nominal fall of 16 per cent in US house prices.

His predictions of house price falls are contained in his statement published today outlining how the economy is expected to contract in coming months.

The Reserve Bank today said it expects the annual inflation rate to leap to 4.7 per cent this year, the highest level in 18 years, but Bollard still signalled a cut in interest rates.

As expected, Bollard left the official cash rate unchanged on 8.25 per cent.

He painted a bleak picture of the economy and because of that said the bank would cut the Official Cash Rate (OCR) later this year despite the rampant inflation.

Part of this bleak picture is confirmation of a big fall in house prices.

"In real terms, we are projecting a 22 per cent fall in New Zealand. This compares to a 38 per cent fall in New Zealand real house prices following the first oil price shock in the 1970s," says Bollard's statement.

"The speed with which the housing market has already slowed raised the risk that house prices will fall more quickly than we have assumed."

Bollard said there was also likely to be significant regional variation in the housing market, with some regions experiencing larger corrections than others.

"Further out, an eventual easing in mortgage rates is expected due to lower official interest rates and improvement in global credit market conditions."

He said these factors were projected to support a "gradual recovery" in the housing market, and return house price inflation to zero.

High mortgage rates, low net immigration, falling real incomes and rising building costs meant there would be a fall in residential property investment.

Tags: alan bollard

Source: NZ Herald

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