“The Reserve Bank wants house prices to rise”

by Ksenia Stepanova14 Dec 2020

The spotlight has been cast onto skyrocketing house prices over the past few weeks, but economist Tony Alexander says the Reserve Bank will likely still want prices to keep climbing, as the number of homeowners far exceeds that of first home buyers.

Alexander also says that interest rates are likely at their lowest point, and that we are more likely to see rises rather than declines – however, he says the central bank will be careful not to allow them to go too far in the opposite direction.

“The Reserve Bank wants house prices to rise because that will help reduce the risk of inflation consolidating too low in their target range of 1% - 3%,” Alexander noted in his weekly commentary.

Read more: Homeownership hits record low in 70 years

“Rising house prices make people feel wealthier and they spend a bit more. The number of homeowners far outweighs the number of first home buyers who might have to cut spending to save more for a deposit.”

“Rising house prices also stimulate house construction, and this sector accounts for around 6% of GDP and provides employment and business opportunities for thousands of people across a very wide range of activities,” he added.

When it comes to business lending, Alexander says banks have been extremely conservative throughout COVID-19 in response to economic weakness and uncertainty. However, he says we can expect them to slightly loosen their criteria as things become more stable and confidence returns – though he warned that we have not seen the last of business closures yet.

“Banks have tightened up policies for lending to business borrowers, in recognition of economic weakness and uncertainty associated with the COVID-19 shock,” he said.

Read more: Orr says RBNZ “cannot address housing challenge alone”

“But as the shock dissipates and confidence about economic conditions improves, banks will become more willing to finance business growth. The chances are good that their improved willingness to lend will coincide with the increased willingness of businesses to borrow and restart their capex plans.”

“History tells us that not all businesses which go under as a result of a recession do so when the economy is actually shrinking,” Alexander explained.

“For some the closure decision can take some time to be made and through 2021 some more businesses are likely to close down and lay off their staff.”

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