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."
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."