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Reserve Bank warns of higher interest rates if house price inflation turns excessive again

Posted in Property

By Alex Tarrant

The Reserve Bank is warning that excessive house price inflation could lead to a higher Official Cash Rate if the recent pick-up in activity, particularly in Auckland, continues.

But it says it doesn’t expect the current pick-up in house price inflation will have the flow-on impact to household spending that was seen through the mid-2000s.

Nonetheless, there was a risk that house price inflation would accelerate further, particularly if supply was constrained by continued low residential construction activity, it said.

The household sector had exhibited a cautious approach to investment and saving since the global financial crisis.

“Housing turnover has been relatively weak and household borrowing has tracked well below its historical relationship with housing activity,” the Bank said.

“Many householders appear to have taken advantage of low interest rates to increase the principal repayments on their mortgages.

“More recently, however, household credit growth, housing market turnover and house price inflation have all picked up. 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-time 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 pick-up in household credit and further increase in house price inflation,” the Reserve Bank said.

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 could necessitate a higher OCR,” the Bank said.

“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-fuelled expansion in house prices would expose households and banks to a sharp fall in house prices,” it said.

But is that coming?

The Bank noted recent building consent and housing turnover data suggested underlying residential investment would rise in the near term.

It said house price inflation continued to accelerate in some regions, particularly Auckland.

“The Bank does not expect this pick-up to substantially increase generalised inflationary pressures,” it said.

“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.

“That said, 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.”

Prices still relatively high

Residential construction activity had been subdued since the 2008/09 recession, with per capital investment declining through to the beginning of 2011.

“Tight credit conditions, tax changes and households’ focus on debt consolidation are all likely to have restricted housing investment. More recently, household credit and growth and sales have picked up from low levels,” the Bank said.

“Together with a lack of new housing supply, these factors have supported growth in house prices. Over the past year house prices nationwide have increased by 5 percent. While this rate of growth is around average, house prices seem elevated relative to fundamental factors, such as income levels and rents,” it said.

“In Auckland, house prices are growing at a faster rate than elsewhere in New Zealand.”

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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18 Comments

THREATS;WE ARE IMMUNE TO THEM

THREATS;WE ARE IMMUNE TO THEM THANK YOU MR RESERVE BANKER
Nothing new to read here then.

OK so he puts up interest

OK so he puts up interest rates by half a percent, a lot by today's standards- the result?
A moments hesitation and then back to business as usual

He is in a position where he

He is in a position where he can only talk about the real problem which is the total failure of the compedative housing supply market.  It is government's responsibility to correct this, but all they seem to want to do is only talk about it also.

Yes it seems Wheeler is not

Yes it seems Wheeler is not going to save Keys bacon. Key has to get off his a... and do something about our uncompetitive housing market.
 
If he doesn't he risks looking weaker than Shearer and that is not a good look.

Does he deserve to be saved? 

Does he deserve to be saved?  Trouble with that thought, is that a lot of innocent people will continue to suffer if this mess carries on.

Oh woe is me... so we are

Oh woe is me... so we are stuck somewhere between high kiwi $ and high property prices... the solution - pay attention to what is being said along with what is NOT being said.
Reserve bank is stuck between a rock and a hard place, in the meantime Auckland property prices (school zoned, transport accessable, leafy street, no gangster neighbour residences) are set to continue upwards.
I have taken a bath selling up personal home plus a rental home in Hamilton (town of the bleak) to get back to vibrant going somewhere Auckland. I would rather have all my eggs in the auckland property market (expensive own home) whilst its going gang busters rather than having a lessor house somewhere and the extra dollars stuck in Hamilton rental going nowhere fast.
So, personally from those who recall my previous advice (i.e. VeeDub, Matt in Auckland etc), the advice it took Bernard a while to take on board - before SK and Big Daddy were even here, I tell you this:
Auckland prices will settle, and it will be a few years from now, but it will be at a new plateau -not just kiwi prices these days but international prices.
Yes Auckland is horribly expensive, but is is rated as one of the best places in the world to live - therefore every one on the planet who can afford to life there can and those who cannot just cannot. It's pretty simple - there are plenty more people on the planet with the means behind them to live in such a place and each day it gets more attractive, plus the fear of not getting ones foot in the door will have folks rattling their dags.
We are almost at that stage domestically where people sell up to down scale and end up paying more for less than they started with - that is when the buying frenzy shall commence in full swing.
Good Luck
President of Property...

Well said, Mr. President of

Well said, Mr. President of Property...
The crux of the problem is the fact that micro-managing an economy is futile. With all the chart reading, projection minding, and interventions, the economy has always done as it would, irrespective of controls and manipulations.
People, like capital, always move to where they are best treated, as you well know.
Better said yet, if central bank intervention would yield the desired result, we would have an economic panacea, and down turns or recesions would be non-existant.
But live pulsates by it's very nature and everything has a cycle. Trying to change that fact is akin to holding back the tide. 
Left to its' own devices the economy would find a balance, and changes would happen gradualy and in proportion to economic agents' interest, you and me, and everyone else. Central banks were created to abort this natural process eliminating chance as an economic force, thus rendering the powers-to-be ahead of the pack. Is it any wonder they vehemently resist calls for the elimination of central banking and fiat money, thus returning to a gold standard?
But, as it has become evident, more stimulus is needed to pick up the economic slack after a slump, and evermore agresive tightening is needed to restrain the "animal spirits" causing inflation, once they get going. The last intervention has been an unprecedented concerted effort by central banks the world over to stimulate their economies. We have had the longest period of ZIRP in the history of the USA, and it's not over yet. In a few years time, when inflation starts to become a problem, central banks throughout the world will in unison raise in an unprecedented fashion the interest rate in their respective countries, trying in earnest to control inflation. Maybe they'll suceed again, maybe they won't, but the day will come when they will loose control, mark my words!
HGW

Meanwhile, here in

Meanwhile, here in Wellington, house prices are still in the 'sane' bracket.
Why the hell should we have our interest rates jacked just because Auckland's propertry market has a flood of money pouring into it?
 

Because we are the big

Because we are the big brother of the nation.  You do what you are told simple as that

Everyone has forgotton that

Everyone has forgotton that the Auckland Council has a new Unitary Plan it will announce shortly where zones will be changed to to become 2-4 times more dense than at present.
This is to stop  Auckland spreading all the way to Wellington and using exisiting infrastructure rather than creating a new one.
Soon where there is one house on a 600M2 section, there will be  three houses on 200M2.
or 4 stories where one there was one.
Guess what that does to land prices and why the more savvy are buying up big now?
read
http://www.aucklandcouncil.govt.nz/EN/planspoliciesprojects/plansstrateg...

Of course it would benefit

Of course it would benefit Auckland long-term if they replaced all the crappy old wooden villas in ponsonby, mt eden and parnell with some smart medium-high density housing, but no jaffa's will ever promote a sensible solution like that....

The Reserve Bank is warning

The Reserve Bank is warning that excessive house price inflation could lead to a higher Official Cash Rate if the recent pick-up in activity, particularly in Auckland, continues.
 
Yeah Right !!! 
 
“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 could necessitate a higher OCR,” the Bank said.
 
Yeah Right !!!
 
“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-fuelled expansion in house prices would expose households and banks to a sharp fall in house prices,” it said.
 
Yeah Right !!!  Other than saving the Banks if they implodes, are you really interested in a rational and affordable housing market ???
 
“That said, 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.”
 
Again, I say the his concern is about the health of the banks and not the Citizens of New Zealand
My personal belief is that the RBNZ is not interested in housing affordability per se but rather it's impact on Bank's financial health....this bubble will grow until it reaches it's untimate end as per 2007/8. then the RBNZ will dully work hard to save the Banks via Liquidity assistance schemes etc etc .
 
All other talk is just spin. 
 
 
 

Egad, BH, now that common

Egad, BH, now that common taters have found wot them buttons do, there's no stopping 'em.  Had ter put on the sunnies ter read the above.
 
Wot about getting a <blockquote>put the quoted text in an inset paragraph of its own</blockquote> buttony thingy?  BQ's only bin around since Al Gore invented the Interwebs, y'know....

<what?> i can do bold font is

<what?> i can do bold font
is it really that </easy>
President of Property

Gee it´s a dangerous game.

Gee it´s a dangerous game.  
Given the outlook for next year which is seemingly worse than this year, it´s all a bit mindboggling.  It appears Aucklanders are taking a punt which could prove to be very expensive. I don´t think the high-end luxury house market is subject to the same price fluctuations as the rest of the market, and perhaps it´s a good punt, but for Mum and Dad Kiwi families it doesn´t augur well.  I guess the RBNZ is issuing warnings as much as they can without scaring the markets. Let´s see what happens after the fiscal cliff, and into the new year which is traditionally the time when Kiwis move house, buy and sell property.
My concern is more about where Kiwis invest. National´s business and immigration policy is not a solution to our economic woes. For goodness sakes - immigrants move here, retire, and put their feet up. Ask Kim Dotcom what he thinks. We need to see immigrants and Kiwis investing in business (low taxes, incentives, loans etc) which create employment. So, when the immigrants move here they have to start a business - full stop. They must invest a minimimum $500K in a new business. Buying a house doesn´t solve any of our woes, it just increases them. Kiwis making money out of trading houses on 100% loans doesn´t produce jobs. Nor does importing people who can´t speak English. Government growth policy is paper based - it´s not based around job growth, or helping business and until that changes nothing else will. Indeed NZ will become an even bigger retirement village for the elderly. No wonder all the young talented people want to leave - who could blame them! 

Totally agree up until

Totally agree up until "englsh speaking" Its not the english speaking thats the issue its,
a) way of doing business, i dont care what they speak as long as they are honest....and have NZ like ethics.
b) types of busineses, as an example we dont need more chinese setting up an import  business  importing more cheap chinese junk.  We dont need any more corner shops either. Neither do we need financial dodgy enterprises....they generate no real inovation or value. If thats the best JK can come up with all I can say is bleh.
c) Buying our production....with surplus US cash or simply illegally/immorally aquired.
d) doing nothing but running a family business.
Most of the above doesnt really help NZers and NZ....you could even argue its detrimental.
what we do need is real tech with well paid jobs and NZers in jobs.  That takes some vision, UFB is one good bit......other thing is training....we seem to be producing media degress and other crap, we need to get real.  We need research, there is no inovation there its just employment for otherwise un-employable academics. Starting to see signs of that but it has a long way to go....and it has to be driven harder.
regards
 
 
 
 

So raise the OCR why dont

So raise the OCR why dont you.....Im sure that will take the un-employment to 4.9% as you predict.............
Real sure.
Oh my god they have employed  a neo-liberal. If he has his way the exchange rate and manufcaturing will be going bye bye......followed by a death dive in GDP as there is nothing left to hold up the bubble.
 
regards

The late Owen McShane

The late Owen McShane deserved to be on the cover of TIME Magazine, or possibly to be awarded a Nobel Prize in economics, for THIS:
"Impact of the RMA on the Housing and Construction Component of the Consumer Price Index" (1996)
http://www.rmastudies.org.nz/documents/ResBankF.pdf
Who else predicted the effect of urban growth containment policies, on monetary policy, this far back?
The OECD is slowly coming around to McShane's kind of insight, years later, and AFTER the effects have half destroyed the world economy, in THIS report:
 
"Bird's Eye View of OECD Housing Markets" January 2010
 
http://www.olis.oecd.org/olis/2010doc.nsf/LinkTo/NT00000AFA/$FILE/JT03277653.PDF
 
Para 55. "Another concern is about the ability of monetary policy to thwart the development of a housing bubble without causing widespread damage to the rest of the economy. In a house price boom, prices increase strongly – often at double digit rates – and expectations of future prices are similarly upbeat.
Under these conditions, large policy rate hikes would be necessary to cool housing markets. High interest rates would crowd out sound and socially useful investments. An additional difficulty for large countries and monetary unions is that housing market developments usually differ across regions or member countries. For example, during the latest housing boom, while prices were soaring in States like Florida or California, they were stagnating in many other parts of the United States. In the euro area, priceswere skyrocketing in Spain and Ireland, but declining in Germany. Devising an appropriate monetary policy response to asset price developments under these conditions is not easy."
Elsewhere in the paper, they say:
"......Price reactions to demand shocks – such as those produced by shifts in interest rates – fundamentally depend on supply responses. If supply is perfectly elastic, house prices will not durably deviate from marginal production costs, which include construction costs, land costs and a normal profit margin of the homebuilder. If supply is inelastic, demand shocks generate price increases, which can be amplified by backward-looking expectations and lead to the development of bubbles....."
They also point out that there has never been so many bubbles in house prices in so many countries simultaneously, before. It is bleedin' obvious to me that the cause is global "save the planet" hysteria in urban planning.