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Opinion: Bernard Hickey finds the Reserve Bank remarkably relaxed about the Auckland house price boom. Too relaxed? And why no LVRs?
By Bernard Hickey
The Reserve Bank seems remarkably relaxed about the housing boom in Auckland.
Its December quarter Monetary Policy Statement essentially says it is watching house prices rise, but it is forecasting the inflation will moderate and that the inflation that’s already happened is unlikely to flow through to generalized inflation.
Here’s the quote:
“House price inflation continues to accelerate in some regions, particularly in Auckland. The bank does not expect this pick-up to substantially increase generalized inflationary pressures. House price inflation is expected to moderate, with house prices already very high.”
“Furthermore, given household focus on consolidation, it is unlikely that the current pick-up in house price inflation will have the flow-on impact to household spending that was seen through the mid 2000s.” It has issued a mild warning that it is watching the loosening of mortgage lending policies and would be concerned if that turned into ‘excessive’ house price inflation.
“There is a risk that house price inflation does accelerate further, particularly if supply is constrained by continued low residential construction. Excessive house price inflation would be concerning both from an inflation targeting and financial stability perspective,” the bank said.
But how much is excessive and at what point would the Reserve Bank actually act to dampen the credit-fueled excitement. High loan to value ratio lending is now much more prevalent in the housing market, particularly in Auckland.
I’ve heard this week from mortgage brokers that banks are starting to offer 100% loans to selected buyers. Competition between the banks has intensified in the last three months since ANZ announced its integration of National bank customers. Lending figures from the banks’ General Disclosure Statements show ANZ and ASB are at it hammer and tongs in the mortgage market in Auckland. Kiwibank is also nagging away on the sidelines, as is BNZ.
Westpac appears to have stepped back from the action for now. Given this intense competition, what’s to stop another credit-fueled bubble developing. The Reserve Bank’s own forecasts are that retail mortgage rates will continue to fall over the next year as lower funding costs on international markets and at home are passed on by banks with plenty of profit to spend on protecting or winning market share. Not nearly enough houses are being built in Auckland in particular.
The Reserve Bank’s warning about bank lending is in its Monetary Policy Statement (Box D on page 20), but it is fairly subdued and certainly doesn’t wave the big stick of Loan to Value Ratio controls.
Here’s the quote:
"Aggressive competition for mortgage lending and lower bank funding costs have seen mortgage interest rates reduce from already low levels. Combined with a relaxation of maximum loan-to-value restrictions by some lenders, lower interest rates appear to have increased the attractiveness of housing for potential first home buyers, leading to a rise in the share of high loan to value ratio lending throughout 2012.
“If the housing market continues to gather momentum, there is a risk of a stronger pickup in household credit and further increase in house price inflation.” “Such developments would have implications for the appropriate stance of monetary policy. Higher house price inflation and increased household expenditure would likely lead to higher inflationary pressures than is currently projected. All else equal, such a development would necessitate a higher OCR
” “Beyond the risks to inflation, the bank would also be concerned by such developments from the perspective of its mandate to promote the soundness and efficiency of the financial system. As reviewed in the latest Financial Stability Report, a credit fueled expansion in house prices would expose households and banks to a sharp fall in house prices.”
There’s no mention in the Monetary Policy Statement, therefore, of using other tools to slow down the lending.
We’ll see what comes out of the news conference with new RBNZ Governor Graeme Wheeler and his appearance before the Finance and Expenditure Select Committee in parliament this afternoon. The big question therefore is how much house price inflation and credit fueled expansion is too much. When would the RBNZ be forced to raise the Official Cash Rate to slow it down? It also begs the question: Why won’t the RBNZ use other tools such as Loan to Value Ratios to slow down the housing market without whacking the rest of the economy with its blunt instrument of a rate hike.