RBNZ says net migration may not boost house price inflation and economy as much as previously thought; more short term workers and fewer departures are factors

By Bernard Hickey

The Reserve Bank has softened its view on whether recent strong net migration could significantly boost house price inflation and increase pressure on interest rates.

The bank explained in its September Quarter Monetary Policy Statement (MPS) that house price inflation, which was around 6%, had been weaker than would normally have been expected given currently high net migration and relatively low interest rates.

It forecast annual house price inflation to drop to almost 0% by early 2017 and it lowered its forecast track for house price inflation by around 0.5 to 1 percentage point over the forecast period.

"Net immigration is assumed to have a more muted and lagged effect on housing demand than in previous cycles," the Reserve Bank said in its MPS.

The Reserve Bank said the different composition of net migration in this cycle could explain the "smaller or slower boost to housing demand than in the past."

"Bank research suggests that reductions in departures boost housing demand by less than increases in arrivals," the bank said, referring to this RBNZ bulletin paper from Chris McDonald in December last year.

"While arrivals have picked up in recent months, the larger part played early in the migration cycle by reduced departures may still be having some effect," it said.

"Further, a large share of the increased arrivals comprises younger working-aged people and people on temporary work visas. These groups may demand less housing than permanent arrivals or those with families," the bank said.

A relaxtion of rules around whether international students can work has increased student visa numbers this year. These students are counted as long term migrants in the figures.

The more nuanced language in the September MPS contrasted with the bank's comments about net migration in its June MPS, where it included a scenario for a rise in annual net migration to a peak of 45,000 in 2015 from its then central projection of a peak of 37,000. It estimated then that this higher net migration would increase house price inflation by around four percentage points and lift 90 day bill interest rates by around 50 basis points. Since then, net migration has been higher than expected, causing some to worry it would force the bank to a take a more hawkis stance.

However, in this MPS the Reserve Bank lowered its forecast track for the 90 day bill rate, seen as a proxy for the OCR, by around 50 basis points over the forecast period. It saw the 90 day rate rising to a peak in the forecast period of 4.8%, down from 5.3% in the June central forecast and down the high migration scenario forecast for 5.84%.

That's despite the Reserve Bank's central net migration forecast rising to a peak of around 41,000 in early 2015 from the peak forecast in June around 37,000.

The bank also noted that net immigration was helping to alleviate wage inflation pressures in Canterbury and the construction sector more widely.

Not completely relaxed

However, the bank remained on guard just in case the net migration surge did have a more pronounced effect on house prices and wider economic demand.

It noted net migration as one of a range of factors it was watching during its pause in interest rates.

"A risk to the projection is that migration flows begin feeding into house price inflation with the same strength as in past cycles -- that is, the composition of migration will only temporarily dampen the effects on housing demand," the bank said.