Extract from 'Markets First' by Jim Power, chief economist with Friends First

In relation to the housing market, there is still nothing in the overall data to suggest that the market is starting to experience a hard landing, but there has been a very definite slowdown in activity in terms of mortgage lending, house building and price growth. Given the strong housing supply that has been delivered in recent years, the increase of 1.75% in interest rates over the past 18 months, with another 0.5% likely by the end of the year and the possibility of more in 2008, and the uncertainty in relation to the post-election stamp duty regime, a slowdown in the market is not surprising. In 2007, house completions are likely to ease back towards 82,000 units, while national average house prices are likely to increase by around 4%, less than half the rate of house price inflation seen in 2006.

From the perspective of the housing market, it is imperative that the new government moves quickly to clarify the stamp duty regime and any changes to mortgage interest relief. Once the situation is clarified, some pent-up demand could emerge to give the market a temporary boost, but the longer-term trend is still towards a gradual slowdown in the market. House price inflation is likely to average around 3% per annum out to 2010 and completions are likely to gradually ease back towards 60,000. Such a ‘soft landing’ for the market would be desirable and improve the longer-term sustainability of the market. For the immediate future rising interest rates and stamp duty changes will tend to be the dominant influence on the market.