Reserve Bank has sharply upgraded its house price forecast for this year - but expects price growth to slow during next year

Reserve Bank has sharply upgraded its house price forecast for this year - but expects price growth to slow during next year

Faced with the reality of an unexpectedly raging house market, the Reserve Bank has sharply upgraded its house price forecasts for the year to December.

The RBNZ now expects house price inflation of 9.6% for the full year as per the bank's latest Monetary Policy Statement. This is a remarkable turnaround from the -6.9% for the year to December 2020 the RBNZ was forecasting in its August MPS.

On Wednesday the central bank announced it was intending to restate the high loan to value ratio (LVR) lending limits that it had removed in May.

The bank conceded it was now observing "rapid growth in higher-risk investor lending".

Presumably based on the knowledge that it is now going to clamp LVR limits back on, the RBNZ is forecasting that house price growth will slow during next year.

It forecasts annual price growth of 7.6% in the year to March 2021, 7.9% in the year to June 2021, falling to 3.9% in September and 2.1% in December next year.

In the latest MPS the RBNZ says the declines in interest rates through 2020 "are likely to have contributed to recent increases in house prices, in part by making mortgages more affordable to service".

"However, the magnitude of the impact on house prices reflects the underlying supply issues in the market: in a more flexible market, higher housing demand would stimulate a larger and faster response in home-building, dampening the impact on prices," the RBNZ said.

It said that when setting monetary policy, the bank's Monetary Policy Committee had regard to the financial stability implications of rising house prices.

"Strong growth in house prices is often associated with increases in risky bank lending to households. However, in the current environment, higher interest rates are not the best policy instrument to mitigate these risks."

'Adding uncertainty'

The RBNZ said higher interest rates now would make loans less affordable and reduce economic activity.

"This would add to uncertainty for households and firms. We would likely see higher unemployment, as well as higher credit impairments in the financial system."

The RBNZ said its upcoming November 25 Financial Stability Report will contain a more in-depth discussion of the financial stability considerations related to household debt.

In discussing the housing market in general in the MPS, the RBNZ said high house prices in New Zealand largely reflect structural and regulatory issues in New Zealand’s housing market.

"In particular, land use restrictions, such as urban planning rules, limit the land available for housing and how intensively it can be used.

"These land use restrictions impede the ability of the market to increase the supply of houses when demand for houses increases. As a result, house prices tend to increase more than otherwise in response to higher housing demand. Other supply-side issues include infrastructure planning, the building consent process, and the cost of building."

'Migration is a factor'

In the context of these supply-side issues, the bank says significant population growth, mainly through immigration, has contributed to rising house prices in recent years.

"Migration is likely to be a factor in the recent acceleration of house prices.

"This reflects that some New Zealanders who were living overseas returned home in the early stages of the Covid-19 pandemic, and fewer New Zealanders have left. More recently, net immigration has been low relative to pre-Covid-19 levels."

The RBNZ said a general decline in the level of interest rates since the early 1990s has been matched by an increase in prices of assets that provide future income or other benefits, including houses.

"Low interest rates are a global phenomenon, and reflect the fact that the level of interest rates needed to match savings and investment in the economy has declined over time. These developments have been largely outside the control of central banks."

On top of these general trends, MPC has acted to lower interest rates to support New Zealand’s economy during the Covid-19 pandemic.

"The MPC’s actions reflect its statutory objectives to support stable consumer goods and services prices and maximum sustainable employment, as specified in the Remit. These actions are helping to keep more New Zealanders employed and are supporting incomes for households."

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65 Comments

18
up

So why not re-instate the LVR's now rather than wait till March next year?

Yeah rediculous it reads a bit like they feel it's beyond their control!

11
up

Yvil,

Spot on. At the time of his appointment, I thought Orr was a good choice-but boy, was I ever wrong. I would clear out the senior management tomorrow.

20
up

Yippee, 10% increase, now people are wealthier they'll go and spend it in the economy. What a load of b*s. Orr needs to go.

12
up

Yes, Orr must be dismissed immediately. He is dangerously incompetent and pigheaded in his stubborn insistence on applying "solutions" that have failed overseas and that are counterproductive and reckless in the current NZ situation. He must go.

It's not Orr's mandate to worry about the impact he's having on house prices, go blame someone else.

12
up

But it is his mandate to maintain financial stability...you think rampant house price inflation in an already over extended market facilitates that??

Just be happy with your low rates, heck, the banks may even make rates lower with the FLP $ if they don't pocket the profit.

Orr's got it under control.

"Ignore the huge problems this creates, be happy you get to enjoy a small benefit in the short term"

I'm guessing you don't give much to charity huh?

11
up

The most important and crucial components in the RBNZ's mandate is financial stability. This is why we have a central bank in the first place. Orr is in clear breach of such fundamental component of his mandate and he should be sacked immediately.

Orr is going to be in the job for a while yet. He's followed his mandate, no less & no more. He can ignore that pesky house inflation issue, it's someone else's problem. It's clearly rude to ask him what he thinks about it and what impact he's having.

I think there is a problem with pre approvals. Pulling finance on someone after they have been approved Is not ideal.

Could you not just enforce the LVR restrictions on new pre-approvals? Existing pre-approvals allowed to run until their expiry date.

12
up

"In the latest MPS the RBNZ says the declines in interest rates through 2020 "are likely to have contributed to recent increases in house prices, in part by making mortgages more affordable to service"

As a consequence the RBNZ has decided to implement a Funding for Lending programme which has the sole purpose of further reducing retail interest rates…

Go figure

Behaviourally..

If you can sit in your house, and make more than the average wage - where is the incentive for employment?
If you are a rentier, making multiples of that and easily covering your carry cost - where is the incentive to employ anyone?
If you are a bank, tossing up a business loan that might make you 4/5% against the security for a residential mortgage that is increasing by double digits turning your high LVR's into low ones - well its not like those business loans employee anyone...

Maybe employment should be part of the RBNZ remit and the remit part of the code of conduct?

Employment is part of the remit.

That's actually one of the reasons they're pushing rates down so much. They have to both stimulate inflation AND ensure full employment

Makes sense. NZ economy outlook is stronger than 2019 and wages have gone up 10%...wait what?!

14
up

"These land use restrictions impede the ability of the market to increase the supply of houses when demand for houses increases. As a result, house prices tend to increase more than otherwise in response to higher housing demand. Other supply-side issues include infrastructure planning, the building consent process, and the cost of building."

This really bothers me as while it is an issue, it's diverting the reality that house price bubbles are credit driven. It's an important issue, but it's smoke and mirrors and basically passing the buck.

JC JC JC rather than just talk about whether building restrictions are the problem or could make a difference just pull the strings and levers to make it happen. When you're in a
tight situation you know you step on the pedal and get moving fast. I heard that redtape was cut and restrictions unrestricted in the early 1970s because of housing shortages and there was a building boom of units and homes that followed that basically saw us through another 30 years of housing needs.

agree - its a diversion to try and shield RBNZ from blame. Used by every man and their dog over the last 30 years to justify the ginormous bubble politicians have been inflating over that time

Without the auckland unitary plan and intensification I don't wonder that house prices would be even (massively) higher

The whole piece is all about them trying to absolve themselves of any responsibility for any problems.

"Oh, but that whole house market booming thing happened because of supply side issues...land use restrictions etc...and yeah... immigration (which doesn't explain the current issue where our population is declining)".

The kicker comes later: "Low interest rates are a global phenomenon, and reflect the fact that the level of interest rates needed to match savings and investment in the economy has declined over time. These developments have been largely outside the control of central banks."

So what they are saying is: "Oh yeah, also, we couldn't help but lower interest rates. We had no choice. Because we had no choice, it was out of our control. Therefore we aren't responsible for our own actions."

WTF are these people on? Are we supposed to eat this garbage up?

Exactly. It's been a convenient neoliberal diversion for years.

Turning into a comedy act

Painfully funny

"In particular, land use restrictions, such as urban planning rules, limit the land available for housing and how intensively it can be used.

"These land use restrictions impede the ability of the market to increase the supply of houses when demand for houses increases. As a result, house prices tend to increase more than otherwise in response to higher housing demand. Other supply-side issues include infrastructure planning, the building consent process, and the cost of building."

Hmm don't know if I agree with this. If you have a reasonable sized property in Akl, and a spare 120k (https://www.subdividesimplified.co.nz/auckland-subdivisions), it's not that hard to subdivide and flick off the new section for a healthy chunk of change. And everyone is already doing it! As the commenter above me alluded - smoke and mirrors..

Exactly. The unitary plan is one of the least restrictive plans in the Anglo sphere.
Cut the BS Orr!!!

It's the most restrictive plan I have ever worked with.

Dale, tell me of a plan in any other city in Australasia that enables as much medium and high density housing as the Unitary plan.
Some of its detail is restrictive, but its lack of density controls is very enabling.

The measure of whether the plan is working or not, is whether it allows you to build more affordable housing, on a like for like basis.

Therefore it's a fail.

Protect the global debt at all costs. Independent...tui.

What a load of bullocks whats happening is because Mr Orr has made it happen "Low interest rates are a global phenomenon again bullocks. All this was foreseeable just like it has been since the beginning of time , its not new. Our currency is dying and has been since 1971

Yeah, pretty soon we'll need to pay for stuff in fractions of houses.
What an awfully long financial system end game this is turning into - looking like a stalemate.
And every year we fuss over who gets rich and who gets screwed the machines only get better.

"The RBNZ now expects house price inflation of 9.6%"

Mission accomplished boys.

So I have to wonder if a trusted old tool will be used in the future, Rent Freeze?

The central bank save my ass declaration:
The RBNZ said a general decline in the level of interest rates since the early 1990s has been matched by an increase in prices of assets that provide future income or other benefits, including houses.
"Low interest rates are a global phenomenon, and reflect the fact that the level of interest rates needed to match savings and investment in the economy has declined over time. These developments have been largely outside the control of central banks."

What's the stated aim of central bank QE, other than to lower term interest rates to "stimulate" bank lending, to spur GDP qualifying growth which demands goods beyond existing production capacity, which then spikes CPI inflation along with rising interests rates as opportunity costs increase?

Seems to me banks see little opportunity to lend to productive enterprise that will repay their extension of credit and falling interest rates are the response to flush out a better collateralised borrower with more than adequate income to service said debt. Central banks actually don't have much of a role in all this. They just follow market interest rates down.

Time for someone to take control of our destiny.

After more than half a decade of disastrous monetary policy which not only failed to stimulate inflation, boost exports or crush the yen, but has brought Japan's banks to near collapse, in August we reported that the Bank of Japan came up with an "ingenious" new plan to flood the system with liquidity: it is paying banks hundreds of millions of dollars in bonuses to boost lending, a move analysts say was aimed at easing the side-effects of its negative interest rate policy.Link

Well, I suppose that is one way of taking control of our destiny.

Sorry I reported this when I went to reply to it. At some stage having so many home owners being reliant on low-interest mortgages of ever escalating amounts is going to be an unacceptable risk to our financial stability.

10% Rise are they joking in Auckland house price compare to last year have gone up by 15% to 30% plus and of this most happened in last 2 months.

If RBNZ wants,can check as just yesterday a 900000 house purchased last year in September (CV 880000) have been sold for more than 1.35 million with multi offer and is not prime or exclusive but just 675 sqmt land and this is not cherry picking.x

Orr recently cut interest rates in half twice from 1.0% to 0.25%

I noticed the same in Wellington. I think 15-20% YoY seems more realistic to me. I'd say it's bonkers, but I feel like a broken record and there's clearly little incentive from our leadership to stop it.

Just one (more) wafer-thin mint Mr Creosote

https://www.youtube.com/watch?v=XJaAXzcXXyE

John Cleese as Adrian Orr
Terry Jones as the NZ housing market

Nice analogy! That explosive ending is worth waiting for.
I guess the other guests slowly giving up and leaving the restaurant are renters and kids.

Monty did great farcical comedy.
NZ's housing market and it's management is similarly farcical comedy.

ONe might think that it's incredibly dangerous, having double digit house price growth during the onset of a recession / depression. But actually the banking system is safer than it's ever been. So long as bank deposits are NOT government guaranteed, increasing the likelihood of bank failure just increases the likelihood of a bank bail out. The PM will NEVER let Nana loose her life savings.

all these comments about LVR - going from 20% - 30% aint going to make much difference. low interest rate and lack of supply are the main causes right now, with lack of supply being the long term issue.

Bang on... you're on the money.

Think about those that have just recently bought though. Finally they have stepped on the ladder and now are seeing 10% house price inflation. This is great. This has vindicated what many have been saying on this site for years and that is buy a house. We can't take this away from them. We shouldn't make any drastic changes. We shouldn't reduce interest rates any further but neither should we increase them. Maybe some mild restrictions on investors.

'We can't take this away from them. We shouldn't make any drastic changes. We shouldn't reduce interest rates any further but neither should we increase them.'

Do you realize that with this sentence you just contradicted the first part of your sentence, or were you being sarcastic?

I don't see a contradiction. You quote three sentences here which is confusing and I am not being sarcastic. A few years ago I got a lot of flak for being a supporter of house price increases. I felt at the time that after years of struggle I was finally making it and suddenly people were wanting to shoot me down and calling me all sorts of names. People who were constantly predicting a crash that never eventuates. We have always encouraged house ownership in NZ and the main reason is because it makes financial sense. We don't want to change that.

To clarify then, you state that those that purchased recently have made good capital gains. But this would not include those that purchased today, and paid for that increase. And therefore following your line of reasoning the system should also protect that investment by increasing the price further so they can also enjoy a similar increase.

If the system has been set up to achieve this, then you have a moral hazard issue because there is a huge cost to this happening and that is being paid by others now and into the future.

It's not so much about people predicting a crash that never happens, it's about calling out a nonsustainable system, even if you/we are a beneficiary of that in the short term.

And yes you are correct about always encouraging house ownership, so how come it is falling? And it makes far more financial sense if the house prices are at 3x median income. Why would anyone want to buy an asset when over half its value is non-valued added costs when you should be able to own it for far less with the same amenity value.

The present system has trapped itself into defending the indefensible, and nonsustainable long term.

During the election asked whether she wanted house prices to go up ardern stated she did not want escalating house prices.... the market is out of control and so is the gubmint.

Nice, my house “earned” more this year than I did!
Better refinance and go spoil myself with a new Ford Ranger and a bit of retail therapy, maybe even a trip to Queenstown!

I’m sure that ^ is the impact that RBNZ and the Govt want to see isn’t it?

Personally I’m going to be boring and use low interest rates to accelerate repayment of my mortgage, but I’m sure plenty of the general public won’t have the same concern or discipline and simply be drunk on cheap debt and wealth that only exists on paper.

While I think you are right to do this it may be just because of our cultural background. I would be much better off now if I hadn't reduced my mortgages and continued with a mortgage that was ten times my income.

The system is setup so that the more money you can borrow the wealthier you are and will be. As long as you can service the debt things will work out better for you.

Why would you accelerate your repayments on your mortgage if that borrowed money is earning 10% and only costing you 2.5%? You fear that the cost of the money will go up? You fear that the asset value will go down? But why? The indicators are the opposite currently. From a business-like and entrepreneurial point of view your strategy makes no sense.

Successful people would consider us to be absolute peasants to think like this. No disrespect to peasants but it is peasant like thinking and I have been guilty of this. At the very least it is not very courageous, not very bold. Common people think you should earn most of your money from hard labour. Aristocrats would privately mock this while publicly applaud it.

Borrowing big is not that easy ZS, the banks are being more responsible with lending than the RBNZ is allowing. Part of the issue is generating enough income to service the mortgage which is tested at 6 plus percent and sometimes a 20 year term as well.

Yeah, but f@&k all those people renting and those young people born at the wrong time. Oh and by the way young people and renters, you have to pay for all the borrowed money we are pumping into the market via taxes on your wages while the owners of the property you live in enjoy tax free capital gains.

Renters subsidising landlords is definitely going to reduce inequality, which Grant Robertson said he was going to do...

Yeah it's totally screwed up.
I only just got in a year ago, it was my last chance given I am well into my 40s.
I meet so many people in their 30s these days who have just given up on home ownership. You can see the sadness in their eyes.
I really don't like the direction this country is heading in, but what do you do? It's patently clear that whichever party is in power they don't truly care about the housing crisis, growing homelessness and rising inequality.
I am angrier with Labour than National, because you always knew with National that they weren't serious and that their support base is generally well off, but Labour?

Young people we know blow their funds on pricey cars with HP... dumb dumb. It makes them feel rich for a short while until reality sets in... btw there is nothing faker than well to do intellectuals that populate the labour party

I too have used reducing interest rates to reduce payment schedule from 25 year to 13 year since buying 3 years ago. Each time a portion of my mortgage comes up for refinance I receive a courtesy call from the Mortgage Broker who is keen to update me on our equity status and remind me that I can release that equity into something like a new car, a boat or a deposit for a rental property.

Just fixed for another one year at BNZ at 2.39%.
Hopefully rates will come down further and this time next year I could fix for 3 years at say 2.5%.

Perhaps the banks can enact one themselves, as some are reported as doing. This would push the hight LVR lending (risk) to other banks.

From -6.9% to +9.6% is 16.5%. That's quite a failure to predict.

They missed the mark by 17.7%.

David - can you guys try and interview Robertson or Woods on this nonsense, they need to be grilled.