Economists say the Reserve Bank will be hoping the Government comes up with something in its forthcoming Budget to help with the fight to rein in the rampant housing market.
The RBNZ is releasing its latest six-monthly Financial Stability Report on Wednesday. While there's some speculation this latest report may include new initiatives against the overheating market, the prevailing view appears to be that its more likely at this stage that the central bank might at most simply outline the sorts of things it might be considering.
ASB senior economist Jane Turner said the RBNZ will be confronted by an "awkward policy dilemma" at this week’s FSR and it would be feeling the pressure - facing the rising tensions between financial stability and monetary policy.
"From a financial stability perspective, house price inflation per se isn’t the key concern. It’s the lift in prices relative to incomes, and in some areas of the country this is a greater concern than others.
"The second issue is the prevalence of investors (particularly when house prices are stretched relative to ‘fundamentals’). The RBNZ is concerned that investors might be more likely to default should a negative shock hit the economy. Hence, the RBNZ wants investors to have a greater equity buffer. With tentative evidence suggesting that the Auckland investor LVR restrictions have merely pushed Auckland investors further afield, the RBNZ may want to broaden the restrictions to the rest of the country."
Turner said that from the market’s perspective, a move to tighten macro-prudential tools would clear the path for further rate interest rate cuts this year.
"However, if the RBNZ opts to wait and watch a bit longer, the market may start to doubt the likelihood of rate cuts beyond 2%, which in turn will support the [New Zealand dollar] and put reaching the inflation target further out of reach. It’s a difficult position to be in, and one the RBNZ can’t solve alone.
"With the Budget coming up at the end of the month, the RBNZ will be hoping for support from across the road," Turner said.
ANZ economists said they believed the chances were growing that the RBNZ will respond to house market pressures by implementing further macro-prudential tools.
"We don’t have any specific expectations, but it would be easy for the RBNZ to broaden the Auckland investor LVR restriction to apply across the country. It also has the ability to increase risk weights on specific sectoral lending. Other options would be restrictions to interest-only lending and debt-to-income or debt servicing restrictions," they said.
Westpac economists said they expected that in the latest FSR the the RBNZ would discuss its macro-prudential options, which included requiring banks to hold more capital, strengthening the current loan-to-value (LVR) restrictions on mortgage lending, or introducing new restrictions on mortgage lending such as a maximum debt-servicing-to-income ratio.
"We would be mildly surprised if the RBNZ committed to any of those options as early as [this] week. However, we do expect the RBNZ to announce some form of macro-prudential tightening before the year is out," they said.
The Westpac economists said that low inflation, low interest rates and high asset prices were a global trend.
"The Reserve Bank of New Zealand can no more stand in the way of this trend than King Canute could prevent the tide. Many central banks are reducing interest rates, and consequently these countries’ exchange rates are tending to weaken. This leaves New Zealand with a stark choice. If we refuse to reduce interest rates the exchange rate will rise and inflation could slump further. If we do reduce interest rates, we will endure rising asset prices. The latter is probably less damaging than the former.
"The best New Zealand can do is prepare itself for the possible fallout from high asset prices. One day global interest rates could rise, and if they do, global asset prices could come under downward pressure. In New Zealand the possible manifestation would be rising mortgage rates and falling house prices. The Reserve Bank must ensure that New Zealand’s financial system is strong enough to withstand such a possibility."
BNZ senior economist Craig Ebert doubted that more macro-prudential policy measures would be proposed this week by the RBNZ. "But it will remain a policy area to monitor closely, as we can see the housing market gathering more speed, especially outside of Auckland. We are also conscious of further housing market measures that might be in the 26 May Budget, which might also be relevant for [Official Cash Rate] thoughts."
However, Kiwibank economists thought there might be a chance the RBNZ would announce further macro-prudential measures this week, "given the housing market is once again adding significantly to credit growth, and NZ’s household debt to income ratio has surpassed the pre-GFC high".
"Given that property investment has been a key driver of the current rise in the credit cycle, the RBNZ may be inclined to roll-out the 30% LVR restriction on Auckland-based property investor lending nationwide," they said.