By David Hargreaves
The strong resurgence of house price pressures in the Auckland market coupled with continued strength in the regional markets has economists speculating that the Reserve Bank might again be moving soon against the house market.
The RBNZ's next six-monthly Financial Stability Report will be released on May 11. That the report will express concern about the housing market is a given. What is less certain is whether any further measures to dampen the market will be signposted - or whether it may yet be too soon.
After new tax rules were introduced in October and then new RBNZ restrictions focused on Auckland housing investors were commenced in November, the RBNZ was keen to wait out the summer and see what the February/March housing sales data brought.
What it brought was a renewed headache.
After the Auckland market had a brief pause, digesting the new rules over summer, the March figures from Barfoot & Thompson, followed by those from QV, suggested the sleeping giant was awakening. Then came the Real Estate Institute figures for March - the ones RBNZ Governor Graeme Wheeler indicated the central bank was watching - and they confirmed, for the RBNZ, the worst.
What would rein the housing market in would be a rise in interest rates. But the RBNZ's faced with an economic situation - particularly in respect to low inflation and a high Kiwi dollar - that is putting downward pressure on rates. The Official Cash Rate currently sits at a record low of 2.25%, having been dropped to that by the RBNZ on March 10. The current expectation is that those rates will have to go lower - though the CPI figures released this week, showing some signs of emerging inflation, did arguably give the RBNZ some breathing space.
In all probability, however, the central bank is going to be forced to dip back into its 'macro-prudential toolkit' in order to attempt to quell the house price pressures.
In their weekly market focus newsletter ANZ's economists said that households were "clearly re-leveraging; we’re not seeing credit growth slow. Debt-to-income metrics are at all-time highs and rising, and saving is negative. That kind of behaviour cannot continue indefinitely".
The economists said that low interest rates were "clearly creating distortions".
"...And while the finger cannot be solely pointed at the RBNZ (we operate in a globalised world after all), it does mean that as the OCR goes lower, the hurdle to additional cuts should be getting higher and higher.
"It all means that in this world, the odds of further macro-prudential measures are increasing by the day. We note increasing chatter domestically on this front and we do feel there is inevitability about it. The RBNZ has a price stability mandate; that is paramount. But it also has a financial stability one and sometimes the two clash, as is the case right here and now."
The ANZ economists said they wondered whether non-Auckland investors were "set to come into the firing line".
"According to QV, investors currently account for 45% of total house sales across the country. A logical first step would therefore be to make the current Auckland LVR restrictions for investors a nationwide policy. In other words, all residential property investors, no matter where they were buying, would be required to have a 30% deposit. It’s tweaking something already in place, and hence easy to do. Targeting property investors is also more palatable than something that could affect owner occupiers or first home buyers."
But the economists also said that "something wider reaching" couldn't be ruled out either, particularly with the Auckland market showing signs of life once again.
"As prices rise, equity of existing property owners rises too, diminishing the impact of LVR restrictions. You simply revalue your portfolio. The RBNZ does have the ability to increase risk weights on sectoral lending or to introduce the counter-cyclical capital buffer (CCB), both of which are far broader-based than the current targeted LVR measures.
"But if the RBNZ really wanted to settle the investor and speculative side of the housing market down – and we think that's in the economy's medium-term interest – it should limit the amount of interest-only borrowing.
"Macro-prudential measures won’t be a panacea for housing market strength amidst supply shortages. Yet housing exuberance at present is becoming increasingly difficult to ignore. The RBNZ’s Financial Stability Report is fast approaching (11 May) and we await it with much interest."
In their weekly commentary ASB economists were also speculating.
They said that with the housing market "reigniting", the RBNZ’s investor and other housing restrictions were beginning to seem “long ago”.
"The Auckland-centric investor restrictions, for example, have simply sent some investors further afield. Some data suggest that Auckland investor buyers accounted for circa 20% of Whangarei and Tauranga sales over the first three months of the year.
"So the question is, how does the RBNZ push inflation back to target without further stoking the housing market? If housing data over coming months confirm the re-acceleration, then we expect one way could be to broaden the investor restrictions later in the year from ‘Auckland only’ to nationwide. Alternatively, the investor deposit requirement of 30% could lift to say 40%.
"These increased restrictions would free up the RBNZ to make the 50bps of OCR cuts that we expect in June and August this year. The above housing complications as well as the slightly stronger Q1 inflation data suggest that the RBNZ may see little urgency to cut rates. In saying this, we cannot completely discount an April cut," the ASB economists said.
And Westpac economists said that for a time, the RBNZ "took heart" from the fact that the Auckland housing market was cooling down; rising house prices in other regions were of less concern as there was no sign that valuations were becoming stretched.
"But with the Auckland market springing into back into life, the RBNZ may be wary of adding fuel to the fire by taking interest rates ever lower.
"That also means there’s a growing risk of another round of macro-prudential measures before the end of the year. The RBNZ has not yet raised that possibility, but the next twice-yearly Financial Stability Report on 11 May would be an opportunity to do so."