By Bernard Hickey
The Reserve Bank has previously been cagey about how much house price inflation is too much, simply pointing out it was concerned about any rise in already high household debt to income ratios and that New Zealand house price to income ratios have been 65% above their historic averages.
Now Governor Graeme Wheeler has fleshed out his views on how much is too much, suggesting a type of 'speed limit' for house price inflation of around 5%, albeit over the long term.
Speaking at the release of the central bank's Financial Stability Report, Wheeler said the bank would like to see house price inflation rise no faster than household incomes.
"We would like to see house prices over the long term increase no more than the rate of nominal income growth. Hopefully, as we start to get the supply response coming in with increased building and the special zones up in Auckland, we'll see some better balance in the housing market in terms of supply and demand," he said.
Wheeler was then asked about the level of household income growth he was referring to, given the bank talked about household income growth of 4% per annum over the last five years. He said he was not talking about a fixed threshold for house price inflation of 4%.
Wheeler referred to a potential real GDP growth rate of around 3% per annum and an annual inflation rate of around 2%, producing nominal income growth of around 5%.
"Let's say nominal income growth was 5% over the longer term. You wouldn't want to see house price inflation on a longer term basis increasing more than 5%, I don't believe," he said.
See the exchange from the 16 minute mark in the news conference video here and above.
National house price inflation eased from around 9% to around 5% between September 2013 and September 24, while annual house price inflation in Auckland slowed from around 17% in August 2013 to below 8.5% in September 2014.
Migration and Auckland the focus in LVR watch
Earlier, the Reserve Bank decided to keep its high LVR speed limit in place into next year, saying it was pleased about a halving of house price inflation over the last year because of the limit and higher interest rates, but that it was concerned about the potential for a resurgence in house price inflation, in particular because of record high migration.
Wheeler would not put a time frame on when the limit might eased, other than to reiterate that it would be temporary and not permanent as similar measures adopted by other central banks and regulators had become.
"We are looking at the migration flows carefully and what's happening to Auckland prices and prices in Christchurch and one or two places elsewhere," he said when pushed on the potential timing for an easing.