RBNZ's Wheeler says Auckland house price inflation over 25% in "dangerous territory" when price inflation should be 10% over 5 yrs "if RBNZ is doing its job"; Spencer says fast rise risks steep reversal

RBNZ's Wheeler says Auckland house price inflation over 25% in "dangerous territory" when price inflation should be 10% over 5 yrs "if RBNZ is doing its job"; Spencer says fast rise risks steep reversal

By Bernard Hickey

The Reserve Bank has ramped up its warnings about Auckland's "unsustainable" house prices after fresh Real Estate Institute figures showed annual house price inflation of over 20% in August, but it has also reiterated it will not use interest rate hikes to slow that inflation.

Governor Graeme Wheeler told Parliament's Finance and Expenditure Select Committee shortly after the release of the figures that Auckland house prices were in "dangerous terrritory." He referred to the REINZ Stratified measure, which REINZ no longer issues publicly for free, showing house price inflation running at 25% in Auckland.

Wheeler pointed to house prices being nine times incomes in Auckland, which was double the ratio in the rest of country and put Auckland among the 10 most expensive cities in the world. He also pointed to investors accounting for 41% of the buying in Auckland, up from 33% a year ago, which was amplifying the swings in the house price cycle.

"The ANZ survey late last year suggested that investors saw property prices cumulatively growing 75% for the next five years. If we do our job properly the price level will go up 10%, so this is just dangerous territory," he said.

National MP Alastair Scott asked Reserve Bank officials whether there was a risk of a crash in some drivers of demand and supply that could cause a turn-around in Auckland house prices.

"House prices in Auckland are not sustainable. The rate of price increase of 25% roughly is clearly not sustainable, but it's always very difficult to pick the top of any asset price cycle," Deputy Governor Grant Spencer said.

"We expect the action we've taken with investor LVRs and that the Government has taken with the two year bright line rule and the requirement to supply IRD with tax numbers will tend to moderate the Auckland market, but the exact path is difficult to pick," Spencer said.

He said the bank had not modelled the effects on house price inflation of the Government's measures.

Spencer said the previous house price surge before the Global Financial Crisis had flowed through into consumer demand and spending and general inflation pressure.

"But this time that's not really happening, so prices are going up, but people aren't spending that additional wealth, so they're not putting pressure on general domestic demand or CPI inflation," he said.

"Hence we don't have a basis under our mandate to lean against it with interest rates, although we do have to have regard to it for financial staiblity, and it is a financial stability issue."

Asked if the wealth effect was being used to buy more houses, he said: "It may be going into the next house. It's feeding on itself."

Asked again about the risks of a sharp fall in prices, Spencer said: "The faster it goes up, the more likely it is you'll have a steep reversal."

Defending single decision maker

Elswhere, Wheeler defended the bank's monetary policy decision making process, given recent criticism by the Greens in particular and former Reserve Bank economist Michael Reddell about the Governor holding the statutory role as the single decision maker for the Official Cash Rate. The Reserve Bank's position of not issuing minutes on decisions or lacking a diversity of advice has also been criticised.

Wheeler said the bank held a three day session before each Monetary Policy Statement where as many as 35 people presented scenarios and modelling and data to debate the forecasts and decision. A committee of 12 people including officials and two outside advisers then provided written advice to a committee of four Governors. This advice also went to the Reserve Bank board.

The Reserve Bank announced on April 23 it had appointed company director Tony Caughey and former Federated Farmers CEO Conor English as the external advisors, replacing Luke Moriarty and Richard Townshend after their three year terms in the role.

"In the end the decision gets taken by the four Governors meeting in a committee," Wheeler said.

"There hasn't been one example in more than 10 years that I'm aware of, not one example, of a decision being taken that was not the majority decision of the 13 that gave advice to the Governor or the Governing committee. That's how we do it," he said.

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?

We welcome your comments below. If you are not already registered, please register to comment.

Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.


Comment Filter

Highlight new comments in the last hr(s).

For the sake of transparency and accountability the government needs to legislate to make the RBNZ publish its minutes

House price increases of 10% over the next 5 years - tell him he's dreaming.

Watch how much the cost to build goes up over the next 5 years. I guarantee it will be significant.

He is fxxting against thunder. If you make an announcement that effectively reduces deposit rates at banks you are in turn making even more people look at investment properties for a better return and even in Auckland. You cannot have it both ways.

Spencer said the previous house price surge before the Global Financial Crisis had flowed through into consumer demand and spending and general inflation pressure.

"But this time that's not really happening, so prices are going up, but people aren't spending that additional wealth, so they're not putting pressure on general domestic demand or CPI inflation," he said.

"Hence we don't have a basis under our mandate to lean against it with interest rates, although we do have to have regard to it for financial staiblity, and it is a financial stability issue."

So, in summary, if the property punters spent their capital gains, acutely rising asset prices could be realised in CPI and the RBNZ could act to curb asset inflation that in all likelihood could lead to financial instability. Otherwise no. Pitiful. It's a global issue of crass incompetence or a rigged game, I know not which. Regardless, It really is the monetary equivalent of “the beatings will continue until morale improves.”


The Doctor Feelgood effect
Now you know why "THEY" removed house prices from the CPI and created a separate HPI index which is not taken into account

Yes you would have to argue that if house prices were included in the CPI we probably wouldn't have had the rises we have seen (or the OCR would be in the 20's).


a) the rest of NZ housing is largely flat with some declining. How do you justify an OCR of say 15% when most of NZ isnt makeing even 4%?
b) the businesses ie tradeable sector with an OCR in the teens would have I think collapsed as per Sweden etc

So thank heavens it isnt.

maybe not as housing would not have been as attractive and therefore less demand forcing up prices


And no one is talking about the big hump of BB retirement phase we are entering - such retirees who, after a lifetime of savings, can't live off them. Couple that with abysmal wage inflation for those working .. and it's no wonder we're getting no domestic demand/CPI inflation.

Capital is eating labour's share of income at a rapidly increasing rate. What's the economics profession doing by way of analysis about that? Should be the lead academic question of the 21st century.

Kate:- What is the economics profession doing by way of analysis about that?

Tony Alexander's latest Sporadic bulletin answers that
He doesn't know - they don't know - the paradigm has changed

On several occasions in the past I have posted comments here on interest.co.nz as to why they can't. It's an impossibility. The economics profession have trapped themselves into a deadly-handshake of their own making - and now they can't get out of the trap

Here is an example of the dilemma - Michael Reddell AKA CroakingCassandra spends a great deal of his time spraying invective at Graeme Wheeler of the RBNZ.. Some of his ascerbic analyses of migration and the absence of a migration dividend are OK, but he gets hooked up on macro data, which most of them do, without making any attempt to understand it

Go back and study this following comment from 2011 - wherein you joined the conversation
There is a great deal of significance in the detail - think about it long and hard
The answer is there - if you look for it - think about possible permutations (possibilities again)
I knew this not - until a professor (with a Phd) from Melbourne University pointed it out to me
They just don't teach that in Economics

The problem I have with most economists is, they are not ppl of science but ppl with a (usually) large political bent trying to justify their Very Important Personal viewpoint with some sort of science, or are the likes of Tony Alexander, bank economists. " offshore things have not turned out as all of us forecasters have been expecting" It is not ALL by a long way. Some like Steve Keen and Paul Krugman (to name but two) seem to be significantly right about the last 7 years. So how long do the likes of Tony Alexander stick with models/viewpoint that is obviously wrong? or maybe the thing should be why are some (many?) ppl still paying him the slightest heed when he clearly has no idea. personally if I had been this wrong for this long I dont think I'd have kept my job.

"The trouble is we don’t yet know what they newly are" I suggest they are not looking, or are afraid of what they see, your second link takes us right back to Bartlett, still being ignored despite the simple math.

As PDK said "Spend a few minutes googling Prof Albert Bartlett - then a few more thinking." neither obviously happened nor will happen.

Yes, I thought absolutely the same thing when reading that Tony Alexander comment. I like your phrase "deadly-handshake of their own making" :-). And yes, I also follow Reddell and you've hit the nail on the head. What's scary about the symptom he's displaying is that he doesn't even know he's got an ailment :-).

Fascinating past discussion (how do you manage to find these things in the archive of this site)? A great look back.

I'm curious, what field of study was the professor from MU specialising in?

I am ever hopeful that the pedagogy of economics will experience a paradigm shift in the not too distant future. Tony Alexander's piece you link to is evidence to me of the frustration of practitioners associated with paradigm change - such change really has to be lead by academia (just as the Chicago School of Economics lead the last paradigm shift), and it seems the practitioners are becoming more vocal about it (even if they've never read Kuhn or Marx or Aristotle :-))!

Correction - he was a senior lecturer in ChemEng
Retired now - was also with the Atomic Energy UK

Not surprising - the natural sciences background. Their training requires them to question everything. Economics training (it seems) does not.

The sterility of the debate

When talking to people in my field, because different people "see things" differently, if they say something I don't understand, I immedialtely ask them to explain in depth the why. I never dismiss their views.

Back in 2011, Matt Nolan of Infometrics was a regular guest here on interest.co.nz. He had published an article on Archetypes in Economics which I had some difficulty understanding. Because Zena and one of her colleagues are Jungian-specialists in Jungian archetypes, I got her to study the article and explain it to me. Result was he had it wrong, so I engaged with him privately. Zena wrote several long explanations to him. I then engaged with him on the subject of probabilities and impossibilities. I submitted one of my research papers to him suggesting he may publish it on his blog. He didn't and the conversation went dead. He never once came back and asked for further and better particulars

So who is right?
Economists who say they can, or a Phd in ChemEng who says its impossible

I notice he doesn't submit articles here any more

Iconoclast hello! I randomly ran into this comment when I was searching for things I'd written in the past on this site.

I hadn't meant to ignore you, I remember the conversation well and thought it was useful - her point was that an archetype exists in the background, irrespective of our description of it, when what I was discussing was stereotypes. I wasn't writing about Jung or Jungian archetypes, I was using the term as synonymous with stereotype so I didn't realise that such a difference existed - that was interesting. It was also a multiple email thread where we discussed things, I didn't just stay quiet.

By the Platonic and Jungian definitions of archetype my paper would be wrong, agree completely. But I was using it as a standard term for "prototype" model - or the fundamental basic model used - which is the core idea behind "folk theories" of knowledge - I repeatedly pointed out that I was using it in this way, which is not inappropriate for my audience who will use the same definition.

I have been writing less here because I went away to do research on income inequality.. I like to pose economic ideas and talk about them, but I can hardly exist in all time and space and cover everything - I am trying to understand the economic world like the rest of us, and have to also work to pay the bills. I am sorry if you felt I was ignoring you, but that was never my intention.

But more generally I find the discussion you guys are having here about economists to be a bit of a conspiracy theory - we all want a better way of describing the social world, and love seeing the application of models from other disciplines to economics. The social world is too important to not be critical of arguments about it - but I don't know why that then makes economists bad for daring to discuss these things ;)

Economists - BBC "The Inquiry"

Population Growth and GDP and GDP per capita
You don't and won't hear this being discussed in New Zealand

Pay particular attention to part II at the 7 minute mark with the Governor of the Central Bank of Nigeria - crystal clear - he gets right into transport, road systems, rail networks, education, and health - could be talking about NZ

Very interesting podcast

Kate... yes.... AND... thats part of the reason why inflation targeting is past its.."used by date".
Using the CPI as a "target" and using the interest rate mechanism to influence the demand for credit .. is a "broken" model..
We have money supply growing at 8%...wage growth at 2-3% ...and CPI at less than 2%.
Of all these measures... the most important ones are money supply growth in relation to wage growth.
( do u ever hear a Central banker say that wage rate growth needs to accelerate...??? )
This might be another way of saying that "Capital" is eating "labours" share of income...
A better "Map" ...... a decline in purchasing power of money.... a transfer of wealth.

What I find disturbing is that Central Bank Governors are not asking questions..... are not revisiting their strongly held beliefs/paradigms..
These beliefs are no longer valid, in my view, in todays world... Central Bankers are partly responsible for creating a new class of "Poor".... ( All the people that do not own assets )..
Its' a travesty..
The principles of exponential growth rates has caught up with us... ( eg. local body rates compounding at 6% vs wages compounding at 3%... it takes a few yrs for the different growth rates to be felt as big changes )

One of the main reasons Central Banks exist... is to maintain the "store of value" quality of Fiat money.
Why they are so fixated on using the CPI as the "measure" of "store of value"... of "purchasing power"...is beyond me...
in my view , .... their actions are destructive... longer term, our problems become worse... not better.

Agree with all of that. Stephen Hulme linked below to a great article pointing out the farce that Central Banks have made of it all in the past century. The main point I took away from that was that they (i.e., our world of financial regulators) are working off a likely false premise (Friedman's analysis of the causes/cure for the Great Depression).

While Auckland is indeed a significant % of NZers the rest of NZ has not seen substantial house price inflation which they can draw down. In fact how many Aucklanders really are "making" a lot of money? a few 100,000s?

Pitiful? that he isnt rising rates?

No - just an obvious, and yet powerless, admission of failure to stop the veil being pulled back on a socialist failure of another sort.

We have reached the outlines of another Thatcher moment, where socialism still makes quite the financial mess, this time, though, not running out of other people's money but rather finding an end to the total deference by which inflationary redefinition and redistribution can operate. Read more

Thanks you just confirmed to me what a right wing extremist viewpoint you hold.

This mess is not down to socialism it is down to free market greed that originated from Thatcher.

As I have told you many times before, I retired at 45 because of the NPV transfer of other's future liabilities to my firm and thus myself. I have been retired longer than I have ever worked. If that does not constitute socialism for the undeserving, what does?

Rackets of this type are authorised in one form or another around the globe.

The program through which that happens, known as EB-5, enables foreign nationals to obtain U.S. permanent-resident status by putting up money for new business ventures that create American jobs. It gives ventures in high-unemployment and rural areas a special status to encourage investment. But as the program’s popularity has soared in recent years, the bulk of immigrant investment is going to projects that are located, like $20 billion Hudson Yards, in prosperous urban neighborhoods. Read more

It's a shame as it looked as if they had got it under control - a gentle correction would have prevented a crash - which won't be good for anyone at all.

They have actually performed stress tests which show price falls of 30% can be easily handled by the banks so the actual 'risk to stability' is questionable. Although another year of 25% gains and they might have to re run the tests assuming 50% price falls which in a years time would still only return prices to say 2013 levels.

Either scenario would have a detrimental effect on spending though wouldn't it, Simon? Even if the banks remain stable.

Put those same stress tests on interest rates. Lower for longer will mean they will never climb very high again.

Did they factor in a potential bank run with those stress tests?
I bet they didn't.
Anyone who has significant savings and understands OBR will be pulling their cash out as soon as banks appear stressed.

Well, there are some of us who understand OBR and are not prepared to wait and see when that stress might show up.


But where precisely do you advise putting the nest egg??

and that is the million $ Q.

Too Late then

What power does the RB have over immigration levels?
What authority do they have over offshore/immigrant relatives/international student parents etc buyers of Auckland housing?
So what effective influence do they have? OCR of 7 or 2 - will make little difference.

That shoul slow down once the jobs dry up.
expect the unemployment rate to climb over the coming months

I think these central bankers have an unenviable task, Considering that they seem to run on ideology and reacting to situations, couldn't we just replace them with algorithms?

And meanwhile the news gets more and more gloomy......

25% crash in the NZD makes Auckland properties 25% more affordable to international buyers. Auckland property is CHEAP from an overseas perspective and is a desirable city to live in. Auckland prices are only going IMO.


Typical media mentality. Sounds much better than someone just lost 25% by buying property in NZ.

Agree. Anyone who that thinks that property increases for the entire country can be fully sustained for the foreseeable future by non resident foreign buyers is just naive.

Those who bought before the dollar dropped are sitting on huge losses. They would not be wanting to sell now to shore up their positions back home.

I think you're right, which means lack of supply on the market until an equilibrium.

Regardless of the perspective of those who have bought and made a 25% loss, the present opportunity for overseas buyers is that they have 25% higher purchasing power than 6 months ago - and what they can get equivalent in Auckland compared to their own city abroad is likely to be appealing.

Unfortunately those who own property in the provinces will only experience increases from Kiwis exiting Auckland sitting on gains as the majority of migrants will only head to AKL.

Lower interest rates only make it easier for those in the market to continue to trade up.

...and as much as we all hate to admit it, Auckland lives in an international world and subject to international market forces rather than being closed to the domestic NZ economy.

my chinese friends tell me it will keep going as many more are still coming and auckland property is cheap for them due to the dollar and what they can afford.

Nothing has changed. Auckland is up for sale on the Global market.

Would they buy in a falling market? They are pretty smart - I would think not unless they genuinely want to get money out of China and into a tangible asset offshore.

Here's my reading:
- Barfoot had price falls last month
- They had their highest ever dropout rate on record (no sale, lose the business) - 23% instead of long term average 14%
- New tax coming October for offshore speculators
- New restrictions on investors affecting 50% of all, reducing their ability to borrow
- China f*cked. Biggest outflows of cash ever, no confidence being expressed, unreal markets
- And dairy, dairy, dairy
- Building in Auckland really picking up
- My fave, a flood of new listings as a sizeable proportion of sensible people decide to get out ahead of the rush
- Chinese buy into a falling currency, is it at the bottom yet? Will their offshore investment fall further as kiwi weakens
- Even Bill English says everyone is going to get burned like he's some bystander.

Am I going mental or does all of that suggest no more growth and probably a fall cause the market has a higher than average proportion of speculators.

Yes, buyers in Auckland couldn't care less about market movements.
Auckland houses are selling due to safe haven aspects, zoned schools, clean natural surroundings, human rights, values based society based on historic heritage, getting money away from foreign Govts, etc.
another 8000 houses will soon be soaked up easily as there are 1.4 billion Chinese, 1.2 billion Indians, another billion Asian citizens, 300 million U.S., 80 million Brits, several million South Africans etc.
NZ Immigration is instructed: full throttle ahead, International student admissions are double extra full throttle ahead, & anyone with $$$ has an Open Door for fast track, & any willing buyer nonresident or short term is welcomed to buy houses in Auckland.
This will all 'stimulate' the economy until NZ can't afford the maintenance.

Most sales I see are to owner/occupiers, kiwi investors, then immigrants, then dodgy dude on phone to offshore dude. At least two of those groups disappear in a falling market and when the economy is no longer rocking the attractiveness to the billions falls fast. Auckland investors can't be so stupid to buy a low yielding asset that is falling in price?

Unemployment is rising. Even 25,000 foreign students a year won't save the place. I don't see your optimism winning!

110,000 International students, and rising.
It's not optimism! It's watching an 'easy fix' govt policy.

They don't care, they have laundered the money...job done

As i said many times before:
- only residents can buy in NZ - THIS IS A MUST !!!!!!!!!!!!
- 50% downpayment in cash
- non-occupied properties - 400% rates
- investment secondary properties (nor primary family home) - 200% rates and 50% tax from profit.

Backlash in Australia on perceived foreign buyers


A group of activists plan to disrupt suburban auctions to protest a Chinese ‘invasion’ of the housing market.

Surely one reason the profits are not being spent here is that those sellers are spending it...........overseas.

Hahaha. Look at the experts preaching. Don't you people ever get tired of being wrong? Spend less time predicting doom and more time making money.

I look forward to more of this banter in a couple of years time - I wonder who will be laughing then. May not be doom but it will certainly be different

Well it's bloody difficult making money when you're on the wrong side of a major correction in your assets or business - that's why you need to keep your eyes open.
On that subject; anyone else noticed how old smiley wavey is looking very worried lately. What does he know that the likes of our friend Onwards and Upwards don't?

He should be pleased we cannot join Australia in bombing Syria - that is not a cheap exercise. But criticism of Australia's trade deal with China may not be so welcome.

Throughout the negotiation stage there is no substantive debate about what constitutes our national interest, and how negotiations can best achieve this. It is taken by many to be article of blind faith that trade deals are fundamentally good. Read more

Pride comes before a fall OnwardsUpwards. What will you change your username to?

Bromhead has the RBNZ's double-dealing exposed in todays cartoon in the Herald On Sunday; the only bit missing is the motivating Bankster hand reaching up though the floor clutching nether regions.

LOL - but a main foreign player banker has delivered the equivalent written diktat to Janet Yellen ahead of next week's much anticipated Federal Reserve rate decision.

From Goldman Sachs:

Although the purpose of raising the funds rate is to tighten financial conditions, markets have already done much of the Fed’s “dirty work.” Indeed, our latest analysis suggests that the recent tightening—if maintained going forward—would be equivalent to around three hikes in the funds rate. Similarly, the GSFCI is now much too tight relative to our “FCI Taylor Rule”, which compares the current level of financial conditions with the “appropriate” level based on inflation and job market slack (Exhibit 11). The easiest way to ease financial conditions—and thereby better align the stance of policy with the dual mandate objectives—would be to signal a later liftoff than markets currently expect. Read more

All the while, 'Liar loans' are back in the US

Ta-da ! - liar loans

What can be done when there is an incentive to do so - even to get around the rules

Graeeme Wheeler and IRD - take note - too easy

Velocity Mortgage Capital LLC, says it writes mortgages for people buying homes only for business purposes, such as renting them out, and requires all customers to sign documents stating their intentions.

One has to wonder if the mortgage securitisation industry is about to move to relieve the banks of high risk weighted mortgage assets with top up CDS protected IOUs for the unwary? Unless, of course there is corporate balance sheet demand for VaR adjusted higher yield securities while a determined Finance Minister seems set to demand a mandated rate repression right while he can?