Graeme Wheeler says the 'trend' of lower interest rates, asset price appreciation and a high NZ dollar 'may finally be turning'; warns on housing market that 'soft landings' after a boom are rare

Graeme Wheeler says the 'trend' of lower interest rates, asset price appreciation and a high NZ dollar 'may finally be turning'; warns on housing market that 'soft landings' after a boom are rare

By David Hargreaves

Reserve Bank Governor Graeme Wheeler is hinting that last month's interest rate cut may be the last for the foreseeable future - and he's warning again about the overheated state of the housing market.

In a speech in Greymouth Wheeler cited "several cross-country studies", which have assessed the economic implications of housing market downturns. 


"This research tends to show that almost half of the housing booms end in a bust, with downturns lasting around four to six years.

"In addition, soft landings in the residential investment cycle are rare, with most collapses leading to protracted falls in private consumption and investment, especially construction investment."

Wheeler said even though it is too early to be sure, there are some indications that house price inflation in Auckland and other regions may be moderating. 

"This may be a result of the increase in loan-to-value restrictions [requiring 40% deposits for investors], higher funding costs being experienced by banks, and tighter credit criteria being applied by banks in connection with financing apartment development and house purchases by offshore residents."

Challenging monetary policy

Monetary policy has been made more challenging in New Zealand by low global inflation and zero or negative policy rates in several major economies, Wheeler said. 

"This has put downward pressure on our interest rate structure and contributed to asset price inflation and upward pressure on the New Zealand dollar. This trend may finally be turning," he said.

“At this stage, global and domestic developments do not cause us to change our view on the direction of monetary policy as outlined in the November MPS [Monetary Policy Statement]. We expect monetary policy to continue to be accommodative, and that the projected policy settings will help generate sufficient growth to have inflation settle near the middle of the target range.”

The low point for CPI inflation has probably passed, Wheeler said, and, supported by the improvement in global commodity prices in recent months, the RBNZ expects the December quarter 2016 CPI data to confirm that annual CPI inflation is moving back within the 1% to 3% target band. 

Growth prospects promising

At this stage, the prospects for a continuation of New Zealand’s economic expansion with above-trend growth, strong employment and rising inflationary pressures looked promising, Wheeler said. 

"The main domestic risk (and one that could be triggered by developments offshore) is a significant correction in the housing market.  At this stage, however, the greatest threat to the expansion lies in possible international political and economic developments and their implications for the global trading environment."

Wheeler said numerous measures indicated that New Zealand house prices were significantly inflated relative to usual valuation indicators.

IMF data showed that New Zealand had the third highest real increase in house prices among 64 countries in the year to June 2016. New Zealand also had the greatest deterioration in the median house price to median income ratio of 31 advanced countries in the period 2010 to mid-2016. OECD data indicated that, relative to their long-term averages, New Zealand had the highest house-price-to-rent ratio, and the second highest house-price-to-income ratio among the OECD economies.

The Outlook

In the absence of major unanticipated shocks, prospects looked good for continued strong growth over the next 18 months, Wheeler said. 

This would be driven by construction spending, continued migration, tourist flows, and accommodative monetary policy. 

The RBNZ November 2016 MPS forecasts showed annual real GDP growth of around 3.75% over the next 18 months, with inflation approaching the mid-point of the target band, the unemployment rate continuing to decline, and the current account deficit remaining within manageable levels.

Historically, Wheeler said, expansions in small open advanced economies come to an end due to one or more factors:

  • global economic growth weakens or slows in major trading partners and affects the terms of trade and export growth;
  • a major domestic policy correction is needed to address a deteriorating fiscal or current account deficit;
  • long-term interest rates rise significantly in response to offshore movements triggered by higher inflation expectations and/or increased risk premia in major economies.  Alternatively, domestic short-term rates may need to rise sharply to moderate inflation pressures associated with growing supply and demand imbalances.

"The main risks to the current expansion lie with future developments in the global economy, and a deterioration in the imbalances in the domestic housing market."

Downside risks

On the downside, the main risks were:

  • the Euro-area economy remains subdued or deteriorates, with consumer and business confidence affected by developments relating to Brexit, migration and anti-globalisation sentiment;
  • the incoming US Administration follows through on pre-election rhetoric relating to trade barriers, and abandons or renegotiates existing trade agreements;
  • economic growth in China slows following a period of financial disruption linked to the very rapid build-up in corporate (mainly SOE) debt over the past 7 years, and a rising level of bad debts in the formal and shadow banking sectors.

"The main upside risk is that the US economy in 2017 grows more rapidly than the 2 - 2.25% growth currently projected by the IMF, OECD and BIS, due to substantial personal and corporate tax cuts and a large increase in infrastructure spending (with no major moves to raise trade barriers)."

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Another isobar on the economic weather map becomes clearer.

Wheeler has no control over the direction of monetary policy, only the peaks and troughs within the trend. The trend is firmly down, right across the world. It is folly to think that New Zealand can fight this trend. The fact that the trend leads to eventual failure is a mathematical certainty.

A quick check of bond yields recently ( the last 6 months) might hint to you that the direction of monetary policy across the globe has altered. Universally, bond prices are down = yields are going up.

Nope, the trend hasn't changed if YOU look a bit harder. We are not even at the top of the descending channel yet for the US 10yr, arguably the most important one. But it doesn't have to descend in a channel, in fact I expect it to flatten out.

But have you thought about this, as you raise interest rates you shrink the money supply. How are you going to stimulated needed growth by doing that?

Increase the velocity. You can have all the supply that you like but if it's not moving you ain't going to stimulate growth.

the velocity of money ... a ridiculous fill the hole concept conjured up by economists when their models didn't work

This idea belongs in the "we pay each others wages" fallacy ... We don't spend money, we effectively spend energy. Every transaction sucks energy from the economy ... so thinking we reuse money over & over again seamlessly creating growth misses a key point - . Energy is what pays our wages.
Unless you can keep "cheap to produce" energy feeding the system even faster .. then... spending faster depletes “wealth” and actually reduces the value of all claims on wealth .

as an aside, Rebel Sport has a half price sale .. the more I spend the more I save ....

You appear to be a technician, so you'd' be well aware that by the time a trend changes the market has moved on to create that change. It's like a train going uphill. For quite a while after the engine is going down, it's still higher than the guard's van that is still going up and has yet to head down. By the time it does, the engine has been going down for quite some time.

No I am a thinker and a theorist. I look for patterns for sure, but I also look for principles. So this answers both you and Tom above.

A few years back I worked out the Quantity Theory of Money was missing interest as a component, so I adjusted it to work it into the equation. M.V=P.Q becomes (M.V)+i=P.Q.

Based on that equation you can make predictions, one is that both interest rates and velocity will decrease over time as the interest payment take a greater slice of the money supply. Money will also increase, it has to in order to service the interest. Exponentially in the end. The only way forward is to ride it to failure. If you increase interest rates in any meaningful way it will introduce premature failure.

Note that my more recent work establishes that this rule applies to any asset that demands a yield.

Note it is difficult to really gauge GDP, the right side of the equation, because price can confuse quantity.

interest rates wise will rise around the world, that is what happens when you print money inflation follows, history has shown failed times that has happened

It would be a mistake to use local examples of hyperinflation from essentially closed economies. It may be plausible if the hyperinflation has flowed into consumables, but instead it has gone into asset prices. No one is going to vote for, or accept, a hit in the capital value of their assets that rising interest rates would cause. We are trapped in a one way street, try to back out and catastrophe happens.

RBNZ said in this speech:
"OECD data indicates that, relative to their long-term averages, New Zealand has the highest house-price-to-rent ratio, and the second highest house-price-to-income ratio among the OECD economies."

These are not facts that the RBNZ can be proud of, they are an outcome of weak lending standards and regulations in New Zealand, and consequently, banks have lent as their incentives drive them: -recklessly.

The end of a high NZ dollar may finally be ending they the dollar climbs higher.

yes,his statement gives the green light to take a bet on our dollar or any NZD based assets,shares,houses.

I know.

The guy is inept, completely inept, but very few people indeed seem to want to do anything about him other than leave him in place so he can "continue to closely monitoring...." as with every other RBNZ statement over the last 3 years.

This from a guy who was confused as to why after the 70% lvr in auckland caused new lending to seemingly jump from the 70-80% mark into the sub 70% mark within months.

His theories were that purchases with more equity REPLACED the purchasers who had been buying. Ridiculous.

How can you be so out of touch with how the game is played?

The real reason which eluded all the propeller heads at the Rbnz is that investors simply got several properties REVALUED to drop their lvr under 70 so they could buy again. Hence the couple of months of slow down.

How could it be possible that a 10% increase in required deposit slow things when property prices are up far more than that?

It is true auckland is past fully priced and will likely see a small pull back and longer period of flat prices.

A ocr at 1.75% is so very much less than the 5% plus that failed to crash the mid 2000s market.

Cheaper regions outside of auckland will continue rising unaffected as low rates will remain for the best part of a decade and yields of 7% plus are still to be had (note a 0.25 fed hike this month and all the talk of trump solving MASSIVE global over capacity issues and causing inflation of ANY great degree is just another slick story to suck in the masses so the banks can make more money out of you).

PS. Property prices have only ever crashed when the KEY ELEMENT OF OVER BUILDING is also present. Hence why nz banks have pulled plug on a lot of development and why key has been reluctant to go too far with large scale house building in auckland.

What cuts. The banks aren't passing on your supposed "cuts".

I note today the ANZ in Australia has signalled it is increasing its floating mortgage rate by .08% to 5.6%. Other banks in Australia have already increased their own rates citing that their funding costs have increased. The ECB overnight stated it was taking the pedal off its stimulus strategy effectively signalling that they feel things are improving in parts of Europe that matter. If the Federal Reserve increases its rate this month as expected then they are saying the States is slowly improving. Overall look to see inflation increase and borrowing rates to increase world wide except for the PIGS of course.