Complaints from housebuilders that the Reserve Bank is playing the Grinch – preventing people from buying new homes at prices hundreds of thousands of dollars above the level a market in equilibrium would have had them at – indicate it will be a while yet before the purpose of the bank’s loan:value ratio ploy will be accepted.
Under restrictions introduced on 1 October, banks must restrict new residential mortgage lending at LVRs of over 80% to no more than 10% of the dollar value of their new housing lending flows. The objective is to stem the astronomic rise in house prices, particularly in Auckland, caused by easy credit being poured (for a decade) into a market with inadequate supply.
The first market response is that houses can’t be built because people can’t borrow. The notion that pricing would have to change hasn’t yet sunk in.
Equilibrium historically was based on tighter credit and the Reserve Bank’s LVR restrictions are a way of returning to that era. Meanwhile, commercial property markets around the world are loosening up: credit seems readily available internationally, so the New Zealand attempt to return to an old-era equilibrium looks destined to fail.
The Reserve Bank left the official cashrate unchanged at 2.5% today. Governor Graeme Wheeler said the bank saw broad economic growth easing the housing shortage, but it was still concerned about house price inflation. The bank remains caught in the bind, that raising interest rates would deflate activity in the housing market but keep the exchange rate up.
In his release on the cashrate, Mr Wheeler said: “The recovery in the US & other major advanced economies remains patchy. Nevertheless, world prices for New Zealand’s export commodities are very high.
“Global long-term interest rates are still very low, but have been volatile recently. This volatility has largely been due to uncertainty as to when the Federal Reserve will exit from quantitative easing.
“The New Zealand economy is estimated to have grown by more than 3% in the year to September. Household spending is rising and reconstruction in Canterbury is being reinforced by a broader rise in construction in Auckland & across the country more generally. This will support economic activity and start to ease the housing shortage.
“In the meantime, high house price inflation persists, especially in Auckland. As has been noted for some time, the Reserve Bank does not want continued high house price inflation to compromise financial or price stability. Recently introduced restrictions on high loan:value mortgage lending are expected to help slow house price inflation and the bank will continue to monitor the situation closely.
“The exchange rate remains high and is a headwind to the traded goods sector. Sustained strength in the exchange rate that leads to lower inflationary pressure would provide the bank with greater flexibility as to the timing & magnitude of future increases in the official cashrate. Fiscal consolidation is also expected to continue weighing on demand over the next few years.
“Annual CPI inflation increased to 1.4% in the September quarter. As domestic demand pressure picks up, headline inflation is likely to rise towards the 2% target midpoint. The bank is aiming to keep inflation & inflation expectations close to 2% over the medium term.
“Although we expect to keep the official cashrate unchanged in 2013, official cashrate increases will likely be required next year. The extent & timing of the rise in the policy rate will depend largely on the degree to which the momentum in the housing market & construction sector spills over into broader demand & inflation pressures.”
Attribution: Bank release.