By David Hargreaves
The Reserve Bank is now more confident that the housing market will not take off again.
In recent releases the bank has expressed satisfaction that the housing market has gone quieter - after introduction last year of 40% deposit rules by the RBNZ for housing investors. But, the central bank has kept cautiously warning that the market may rebound.
However, in the latest Monetary Policy Statement, RBNZ Acting Governor Grant Spencer has changed tune somewhat.
He notes again that house price inflation has moderated due to loan-to-value ratio restrictions, affordability constraints, reduced foreign demand, and a tightening in credit conditions.
This time around, however, he says: "Low house price inflation is expected to continue, reinforced by new government policies on housing."
The previous warning contained in past releases that "there remains a risk of resurgence in prices" has gone.
In the MPS document itself, the RBNZ says that residential investment has been supported over recent years by low interest rates, strong population growth, a shortage of housing, and high house prices.
Weaker residential investment growth
"However, growth in residential investment has weakened in each of the past four quarters.
"Residential construction in Canterbury has fallen from a high level, and elsewhere the sector appears to be approaching capacity limits," the RBNZ says.
"Businesses are reporting greater difficulty accessing land, labour, and materials.
"Also, partly reflecting growing risks in the construction sector, banks have tightened lending standards for residential property development.
"We expect residential investment to provide less impetus to aggregate growth and capacity pressure over the next year than previously assumed," the RBNZ says.
It goes on to say that changes to loan-to-value ratio (LVR) restrictions, a tightening in lending standards, and a lift in mortgage rates through the end of 2016 have moderated the demand for housing and slowed house price inflation over the past year.
"Pressure on affordability, reduced demand from foreign buyers, uncertainty around tax policy, and revised expectations of future capital gains may be further tempering demand at present."
The RBNZ does say that It remains uncertain how persistent the slowing in the housing market will be.
"Household consumption has strengthened since mid-2016 and has been stronger than expected based on its historical correlation with house price inflation.
"Aggregate consumption growth is being supported by low interest rates, high terms of trade, and strong population growth. It appears household spending may be less responsive to changes in housing wealth compared to previous cycles."
OCR left unchanged
The RBNZ has as expected left interest rates, via the Official Cash Rate, unchanged at 1.75%.
But of bigger interest is the outlook seen for the bank - and here there have been some tweaks.
The RBNZ has tried to incorporate some preliminary estimates of the impact of the new Government's policies in its latest set of forecasts - though it says there is a great deal of uncertainty around this.
One of the more significant changes in tone in the Acting Governor's latest statement, when compared with the previous one in September, is that the references to a lower dollar being desirable have been removed.
The Kiwi dollar has fallen substantially in recent times.
In the latest statement Spencer notes the recent decline in value of the dollar and says that if sustained, this "will increase tradables inflation and promote more balanced growth".
Following the release of the latest RBNZ statement the Kiwi dollar was at about US69.5c, up from just under US69.3c before the statement.
In summary, the RBNZ now sees a very slightly earlier start (June 2019 versus September 2019 previously) rise in official interest rates. It's seeing slightly higher inflation in the short term and a weaker dollar - though the latter reflects recent weakness in the currency since the new Government was settled.
ASB chief economist Nick Tuffley said a key development with the RBNZ's latest statement was the inclusion of initial impacts of the new Government’s fiscal spending, Kiwibuild, migration changes, and minimum wage increase.
"On balance these changes are likely to be more inflationary than the previous assumptions the RBNZ used," Tuffley said.
He noted, however, that despite including those changes, the RBNZ’s OCR forecasts started edging up only a quarter earlier.
"Moreover, the forecasts still have the OCR averaging 2% over the March 2020 quarter.
"By implication, the RBNZ’s forecast see – at the margin – a touch more risk of an earlier start to OCR increases, but fundamentally still a core view that the OCR is likely to remain on hold until around late 2019."
This is the statement from RBNZ Acting Governor Grant Spencer:
The Reserve Bank today left the Official Cash Rate (OCR) unchanged at 1.75 percent.
Global economic growth continues to improve, although inflation and wage outcomes remain subdued. Commodity prices are relatively stable. Bond yields and credit spreads remain low and equity prices are near record levels. Monetary policy remains easy in the advanced economies but is gradually becoming less stimulatory.
The exchange rate has eased since the August Statement and, if sustained, will increase tradables inflation and promote more balanced growth.
GDP in the June quarter grew broadly in line with expectations, following relative weakness in the previous two quarters. Employment growth has been strong and GDP growth is projected to strengthen, with a weaker outlook for housing and construction offset by accommodative monetary policy, the continued high terms of trade, and increased fiscal stimulus.
The Bank has incorporated preliminary estimates of the impact of new government policies in four areas: new government spending; the KiwiBuild programme; tighter visa requirements; and increases in the minimum wage. The impact of these policies remains very uncertain.
House price inflation has moderated due to loan-to-value ratio restrictions, affordability constraints, reduced foreign demand, and a tightening in credit conditions. Low house price inflation is expected to continue, reinforced by new government policies on housing.
Annual CPI inflation was 1.9 percent in September although underlying inflation remains subdued. Non-tradables inflation is moderate but expected to increase gradually as capacity pressures increase. Tradables inflation has increased due to the lower New Zealand dollar and higher oil prices, but is expected to soften in line with projected low global inflation. Overall, CPI inflation is projected to remain near the midpoint of the target range and longer-term inflation expectations are well anchored at 2 percent.
Monetary policy will remain accommodative for a considerable period. Numerous uncertainties remain and policy may need to adjust accordingly.