Cool 2015 NZ housing market forecast on prospect of higher rates – Fitch

New Zealand's housing market is expected to cool this year on the prospect of more interest rate hikes by the Reserve Bank, according to rating agency Fitch Ratings.

National house prices are expected to rise 2.5 percent in 2015 with higher interest rates increasing the cost of servicing mortgages and as building rates in Christchurch and Auckland, the country's two biggest cities, boost supply, Fitch said in its global housing and mortgage outlook. That's less than half the 6 percent annual pace in the 12 months ended Nov. 30 in the Real Estate Institute's stratified housing index, which strips out peaks and troughs in house prices. The REINZ is expected to release its December update this week.

"Most existing borrowers in New Zealand are more immune against the expected continued rate rises as the market is largely composed of short-term fixed rate loans," Fitch said. "However, new buyers do not benefit from this protection, which will keep house price growth low."

New Zealand's Reserve Bank hiked the official cash rate four times to 3.5 percent from 2.5 percent in 2014, having introduced restrictions on low-equity home lending in October 2013 as a means to cool the property market without putting upward pressure on the currency. Auckland housing has been problematic with inbound migration driving demand, while under-investment left supply lagging.

While New Zealand house prices are likely to slow their gain this year, Fitch anticipates housing affordability for new loans will get worse in 2015 as the increase in prices and higher interest rates takes up a larger portion of households' disposable income.

Fitch said mortgage rates are seen rising with the official cash rate, though falling oil prices and tepid inflation in recent months has prompted local economists to push out their timeframes for the next rate hike by the Reserve Bank, and lenders have already cut some mortgage rates this year in anticipation of renewed interest in the property market.

The global rating agency expects mortgage arrears to stay broadly unchanged, rising to 0.7 percent of loans 90 days or more in arrears this year and to 0.8 percent in 2016, though an improving employment outlook should provide some insulation.

A slower pace of house price inflation will likely slow lending growth, which was running at an annual pace of 4.8 percent in the year through Sept. 30, 2014.

(BusinessDesk)