RBNZ's Wheeler says wouldn't want to see house price inflation faster than household income growth of around 5%

RBNZ's Wheeler says wouldn't want to see house price inflation faster than household income growth of around 5%

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.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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I've said this before - in short, it's not the prices can't go higher its that they won't go higher - mostly for political reasons (Wellington + RBNZ) as much as any other reason.
Higher LVR deposits, higher interest rates, new capital rules for property investors with 5+ properties, etc, etc, etc - the point is not whether these are the ideal tools it is that they are and will continue to be used by the RBNZ as necessary.
House prices can't grow faster than incomes forever in any case so all the RBNZ are doing (successfully I think) is reducing the size of the price peak and therefore the size of the subsequent bust.

Can anyone say they have had a 5% or greater pay rise year on year for the past 5 years?
(bird tweets softly in the background whilst no one answers)

Certainly not the domestic suppliers of bank funding. In the RBNZ's own words;
Funding costs have declined substantially since
early 2012. Strong non-market funding growth has also
allowed banks to compete less for domestic deposits,
resulting in a substantial decline in retail deposit spreads
(refer to figure 3.12)
. Read more page 40 and fig. page 20
The big boys shot through - probably because of OBR and better pickings in the morally hazardous QE supported stock markets.
There has been a slowdown in non-market
funding growth since the start of 2014. Larger deposits
of more than $50 million have been a key contributor to
this slowdown (figure 5.5)
. Read more page 39

Yes - twice that in in construction industry. 

"Can anyone say they have had a 5% or greater pay rise year on year for the past 5 years?"
Yes - all the senior staff at the RBNZ.

So if prices went up 20% one year he wants zero for the next 4? Probably more like their inflation target. Any anomalies are ignored or they "look through" them.
5% pa still seems very high relative to wages which are static for many. Surely if affordabilty of 4 times income is going to be a goal in Auckland (according to Nick Smith), wages have to outstrip property inflation for 20 years. Wasn't that the calculation recently?

4% over 5 years is greater than 20% in 1 year and 0% for the next 4 years.

Of course, property only ever goes up!

NZcoolie..   using your logic ... Can you expalin how money supply grows..???
Who creates the new money..???      It is not savers....

Just as an aside there is no fractional reserve banking in operation within the borders of New Zealand. You could try to hunt around RBNZ data to locate a table similar to this one produced by the US Federal Reserve, but it doesn't exist. NZ adheres to BIS capital leverage rules with the added twist of leveraging up the NZ deposit base with hedged wholesale foreign borrowing to a level of ~130 to 140 percent of bank assets to local deposits.
Furthermore , the efficacy of it's operation as a stabilising force in the US monetary was removed once the banks were authorised to sweep transaction monies into money market deposit accounts without fractional reserve requirements - hence BIS rules pretty much rule in the US as well. You will note the tiny reserve requirements in relation to the enormous US credit balances as evidence.

Stephen H, i suspect that banks short circuited Fractional reserve lending a long time ago.
Supose the reserve ratio is 10% and you deposit $10k with me. Instead of lending $9k then $8,100 and so on.
I would just put your $10k in the vaults and lend $90k
Much simpler.

Another old trick is if I have a customer who wants to borrow 100k @ 10%,  I record the loan as 111k @ 10%.  Use the first 10k to replace the core holdings fraction, and 1k to pay off the first years interest. then refinance or re-factor the loan to repeat the same trick next year.  That way my core holding is always "in the vault"

Rubbish...loans are brought into existance by banks no need of NZ savers.

This article may prove to be a useful backdrop to that which applies in NZ and where Moody's recently claimed foreign wholesale borrowing pushed the asset to liabiltiy ratio beyond the prudent 100% of local deposits - such an update confirming this ratio is below the previously noted 140% level offers limited comfort to depositors.

As usual ostrich your critical insight is salient in a commentary stream less so.

LOL, great post.
I sit here wondering just why the bankers, economists and pudits think NZ is doing so well and inflation will be here soon. My conclusion is ivory towers, they really do not see or comprehend how hard it is for a significant % of NZers. Uterly disconnected.
In terms of commodities I am looking at the BDI and not seeing a huge drop off in that, though it is still way lower than 2007.
(5 year)

very much the case.

I think you do not understand CPI,
"The consumers price index (CPI) gives you information about changes to the prices of consumer items New Zealand households buy"
ergo there is no direct wages in CPI that I am ware of?  Besides which its close to zero anyway I suspect for much of retail.
On top of that we have other measures looking at wage inflation.

Further . . . . straight from the horses mouth

Late yesterday. in a full report from the enquiry .. Wheeler went on to say that LVR's will remain in place while

(a) migration remained at elevated levels, and
(b) new-build housing supply remained at low levels

Which means

(a) Any efforts to stimulate new-build activity will be completely absorbed by migrants
(b) The only offset would be to build state-houses only, and restrict access to locals
Now that's a poke in the eye for government
We all know migrant numbers are a problem
Wheeler says migration is a problem
Key and English say it's not

So, the people you speak of are all accommodated in camper-vans, lean-to's, tents and humpies and should not be counted?

This is how they keep the wages pressure down at and below zero - in ChCh
A certainty they weren't paying PAYE on the wages either - no wage records kept
The judgement against them is just the start of their worries
Suprised they are going to appeal the ruling, keeping it in the news
Some people are wise, some are otherwise. Some know when to fold-em
Next the IRD will come calling with added penalties
They should be deported

Wheeler is telling everyone that if you put your money into housing you will do really well.
You will get a minimum of 5% capital gain.
Wheeler expects real GDP growth of 3% and inflation of 2% a total of 5%
Lets see, in 12 months from now, if he is right. I will hold him to that and i bet he is wrong.
There is no way we will reach 5% - Dreaming, but lets wait and see.
Oh, i should add
If Wheeler is expecting 5% growth in GDP then he has no plans to put up interest rates and kill that growth. And may even be planning on reducing interest rates.
Whatch this space.

Yes - Wheeler has no idea what is happening. In 12 months LVR will still be here and house prices will have increased by another 10% in Auckland as the migrants pile in and new house construction lags behind.