Housing market still a risk - RBNZ

Auckland’s housing market continues to be one of the major risks to New Zealand’s financial system, according to the RBNZ’s November Financial Stability Report.

Reserve Bank Governor Graeme Wheeler flagged the issue of Auckland’s house price to income ratios – which now stand at 9.2 as compared to 6 in 2011

This ratio is comparable to those seen in some of the world’s most expensive cities.

Wheeler said rising investor activity, which now accounts for about 40-41% of activity in Auckland, has been an important driver of recent price developments.

This concerns the RBNZ as international evidence suggests investor loans have a higher tendency to default in the event of a major downturn in the housing market.

The new LVR restrictions on Auckland investors are expected to help moderate the pressure on the market improve the resilience of bank balance sheets to a housing downturn.

In a media conference today, Wheeler said it is still too early to judge the effect of recent policy changes.

“The latest REINZ figures show a reduction in sales in Auckland in October. This might be a short-term response. Time will tell if there is a sustained impact, but we think there will be.”

However, on the topic of further regulatory measures to contain investors, Wheeler was non-committal.

He said that overseas experiences showed that capital gains taxes are not always a panacea to housing market inflation.

“We do support the government’s introduction of the bright line tax. At this point, it seems a helpful measure.”

The RBNZ also has no current plans to introduce a debt-to-income ratio - although it is watching the banks’ total-debt-to-income multiples.

Wheeler emphasised that the best solution to the pressures in the Auckland market was to effectively address the supply shortage.

ASB chief economist Nick Tuffley said the RBNZ is clearly hoping that the combination of its new LVR restrictions and the government’s tax changes will cool the Auckland market down going forward.

“Their estimations are that it will knock back sales turnover in Auckland by 13% and cause house prices to be 2% to 4% lower than they would be otherwise. This would take the edge off the market.”

While the October REINZ data show a marked pullback in sales, it is a watch and wait situation, he said.

“It is way, way too early to get a sense of what their impact will be. It will take a bit of time, at least six months, to gauge.”

For this reason, the RBNZ doesn’t appear to have any further investor restrictions in mind at this stage.

“But I would rule out the possibility of the RBNZ further relaxing its out-of-Auckland speed limits.

“They were introduced when the ex-Auckland market was benign and evidence shows that has now changed in places like Hamilton and Tauranga. The RBNZ knows it has to be careful of the potential for spill-over from the Auckland market.”

In its statement, the RBNZ said it is now closely monitoring the recent rises in house price inflation in some ex-Auckland areas like Hamilton and Tauranga.

Overall, New Zealand’s financial system continues to perform well, according to the Financial Stability Report – which can be read here.

This is despite a deterioration in the outlook for global financial stability and the increased risks posed by the dairy and housing sectors.