Fears that the housing market in New Zealand is overheating has raised concerns that mortgage interest rates will increase sooner than expected in a bid to cool the market, according to economists.
Some property experts are predicting that prices will rise by 9% this year with some already increasing by 1.7% in the last three months and 6.3% in the last year.
Now economists are saying that the current interest rate of 2.5% will have to be increased by the end of the year to help control the property market.
They add that once rates rise they will increase to more than 4% by the end of 2014.
Dominick Stephens, an economist at Westpac Bank, said: “Given the current state of the market, house prices could easily rise 9% this year nationwide.”
Mortgage rate to rise
The country’s reserve bank is forecasting that interest rates will remain unchanged until early 2014 and then rise slowly.
Westpac is predicting that interest rates will move sooner because of the rising property market and that the reserve bank’s fears over the property market will be realised.
In the past year, the country’s property hotspots have been Auckland and Canterbury which have seen rises of 10% and 7% respectively.
However, the views of Westpac are not shared by Deutsche Bank which says that property price increases are not of concern and that lending has now steadied.
Economists at Deutsche Bank also say that inflation in New Zealand is still low and the job market is weak so rates will not change until next year.
In addition, the New Zealand dollar is growing in strength and has risen by 4% against major currencies since December.
There’s also a growing debate in the country about the impact of the worsening drought which may cost the economy £540 million.
Drought fears
New Zealanders have cause for concern since the last serious drought which ran from 2007 to 2009 was the tipping point for the last recession.
Economists say the reserve bank has not factored in the impact a drought on the New Zealand economy this year which may force it to increase interest rates sooner and move to protect its economy.
Deutsche Bank is predicting that without significant rainfall in the next two months, the drop in the country’s farm production could see 0.5% being wiped of the country’s economic growth.
Analysts have also noted that the reserve bank has started discussions with the country’s mortgage lenders about how to control lending and of the potential risks which are building up for the country’s banking system.
Apparently, they are not talking about directly controlling house prices or inflation.
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