House price heat may put brakes on interest rate cut

Strong expectations of higher house prices could scuttle the Reserve Bank’s plans to cut interests rates this year to avoid another housing boom, ASB says.

Expectations of higher house prices have risen strongly this year driven by cheaper interest rates and a severe shortage of properties for sale, according the latest ASB Housing Confidence Survey.

A net 45 per cent of those surveyed believed house prices would rise while a net one in five said now was a good time to buy, the survey for the three months to April shows.

Low mortgage rates and greater confidence that house prices would go up meant the market was ‘‘ripe for an increase in the more speculative activity that the Reserve Bank views dimly’’, ASB said.

Last month the Reserve Bank implied interest rate cuts might be considered if the exchange rate remained high, leading to the financial markets pricing in a rate cut for this year. ‘‘The state of the housing market suggests that the Reserve Bank may be rather more cautious.’’

While price expectations were up most in Christchurch, they were at their highest level in Auckland since April 2007, ‘‘the last time housing market activity surged before official cash rate [OCR] increases cooled the market,’’ ASB says.

Higher sales and prices late last year to early this year were due to a shortage of properties on the market and few new listings, especially in Auckland and Christchurch, rather than a surge in demand.

‘‘The overall level of demand remains relatively subdued, and we expect the combination of weak population growth and a sluggish labour market recovery will limit the pickup in housing turnover.

‘‘For that reason, we believe that house prices will continue to rise at moderate rates [of about 4 per cent] over the rest of 2012 as supply starts to respond to recent price increases.’’

House sales in April were nearly 14 per cent higher than a year ago and national median prices were up 2.7 per cent, adjusting for extremes, according to Real Estate Institute figures.