New Zealand House Sales Drop: Will Interest Rates Follow?

There appears to be mounting evidence that New Zealand's current interest rate cycle has hit its top: which will be a relief to those paying nearly 11% on their mortgages.

Higher fuel and food costs have also dented consumer spending while tighter international credit conditions have kept investors out of the market. The small New Zealand economy is always vulnerable to international credit crunches and the oil price is critical for a country who imports all its oil (petrol is now at NZ$2.25/litre).

The Real Estate Institute of New Zealand is reporting that in June 2008 the average house price fell to NZ$340,000, down 2.2% from the previous month. Far more significantly the number of house sales is down to 4305 a huge 42.4% reduction from June 2007. The days on market has also markedly increased to 53 days, up from 30 days a year ago.

Local real estate agents in Wellington report that the market has been "dead" since February. There appears to be the normal disconnect for sellers not realising that the market has changed and pricing too high: thus causing the blow-out in days to sell on the market. In Auckland slowing sales started over a year ago.

Economists are saying that the housing market is unlikely to be a major factor for the July 24 Reserve Bank review of interest rates. They may however be missing the point: New Zealanders love affair with probably is deep and visceral. Its not just about the figures, though the favourable tax regime helps, its about a deep-set distrust on stocks and shares: with a generation being wiped out economically in the 19877 stock market melt down. New Zealand's share prices took the longest of all Western economies to recover and NZer's have very long memories.

Our estimate is that interest rates will be on hold on 24 July but that the Reserve Bank may move to lower them in September or October. Which will be a boost for the government who has an election coming up, most probably in November.

Photo credit: coba