RBNZ says house prices remain elevated and could fall further, warns banks lending on higher loan-to-value ratios

By Alex Tarrant

The Reserve Bank of New Zealand says house prices in New Zealand still seem elevated relative to incomes and rents, and has warned it is monitoring banks as they increase loan to value ratios in the face of elevated prices.

The comments came in the Reserve Bank’s twice-yearly Financial Stability Report released today, in which it said house prices may drift lower if enough buyers were unwilling to pay currently high asking prices.

Nominal house prices had only fallen 5% from their peak in late 2007, or 13% in real terms, the RBNZ said.

“While prices have not fallen far, housing market activity has been particularly weak over the past 18 months,” it said.

Tax changes, low confidence, low net migration and sellers’ unwillingness to accept lower prices had all contributed to slower housing market activity, the RBNZ said.

“There are few signs of an excess in dwellings (with construction weak in recent years), particularly given the earthquake-related damage in Christchurch. Some recent data has also suggested Auckland house sales and rents are strengthening,” it said.

“However, given that prices appear elevated relative to historical relationships with incomes and rents, prices may yet drift lower, particularly in real terms, for example if enough buyers are unwilling to pay current prices and prefer to rent while sellers’ expectations adjust,” the RBNZ said.

Any further negative news could cause a sharper downturn in the housing market, particularly if the labour market were to weaken sharply, or if interest rates were to rise rapidly, the RBNZ said.

Economists are expecting the Reserve Bank will next raise the Official Cash Rate in either December this year or March 2012, after the bank cut the OCR to 2.5% earlier this year as an ‘insurance policy’ for the New Zealand economy following the devastating February 22 earthquake in Christchurch.  

An eye on LVR increases

Meanwhile, in light of seemingly elevated house prices, the Reserve Bank warned it was monitoring banks as they increased loan-to-value ratios in bids to draw customers to the subdued housing market.

Tight lending conditions appeared to have begun to ease, the RBNZ said, adding there had been a material easing in lending standards in corporate lending as banks competed for business.

“Some banks have also increased maximum loan-to-value ratio requirements for home buyers,” the RBNZ said.

“The Reserve Bank will continue to monitor this lending, especially since house prices seem to remain elevated,” it said.

'Housing market bottomed out'

In the media conference accompanying the Financial Stability Report, Bollard said the current climate for the housing market, given high loan-to-value-ratios, was different to what was seen in the boom years of the last decade.

“What’s different this time is that there’s a concerted effort by households to be cautious to reduce debt, there’s signs that the housing market has bottomed out and is showing the start of a bit of growth, but we’re really not seeing the preconditions for any big rise in house prices or big rise in debt exposure,” Bollard said.

He did not think the banks were necessarily being irresponsible by promoting higher LVR ratios at the current time.

"You’ve got to look at where they're doing it, under what conditions they’re doing it," Bollard said.

"As I understand it that’s a pretty limited extent at the minute. It’s something that we will continue to watch pretty closely and we wouldn’t hold back going and telling the banks our views if we thought that was getting too exposed, but I don’t think it’s like that at the moment," he said.

'Supplementary tools not silver bullets'

Meanwhile Bollard said the Reserve Bank had now established quite a bit more information on supplementary macro-prudential policy tools it could look to use to control bank lending and asset price bubbles.

"We think there are some tools that, under very specific circumstances, could be helpful in assisting macro financial stability through the cycle," Bollard said.

"We do observe quite a lot on interest and some excitement around the world on these, and some of that is going to be disappointed because some of it, we thing, is unrealistic. We’re trying to be very realistic about this. We think some of them do look helpful. Could they help monetary policy as well? Well, only indirectly but possibly in the same direction," he said.

"To be a bit bit more specific, were we to see a build up of asset prices, or property prices, in a way that looked like it was leading back into the last sort of bubble, boom, then we would certainly look at some of these things, such as core funding ratios.

"But we don’t have huge expectations about those as silver bullets," Bollard said.

(Updates with 'no silver bullet' comments, comments from media conference on housing market bottoming out.)