Orr said banks had previously been too slow to raise deposit rates even as they were raising mortgage rates.
“That has changed now both in levels and in volumes,” Orr said.
Assistant governor Karen Silk said net interest margins had widened considerably but now “we're seeing a change in behavior from consumers” moving out of low-interest on call accounts and into term deposits.
That is starting to depress banks' net interest margins, which had risen as high as 3% for new flows, but they're now back about 50 basis points.
“We do believe margins will come back to more historic levels of around 2%,” Silk said.
Green Party member Chloe Swarbrick asked Orr to elaborate on commentary in Wednesday's monetary policy statement saying that house prices appear to have stabilised.
Orr said “sustainable price doesn't mean affordable for everyone. So, two very different concepts,” but that based on current underlying economic drivers, house prices are explainable.
These include the cost of building versus buying, the cost of renting versus buying and investing in houses rather than other investments.
“Without doubt, house prices were well above any of those sustainable measures through the covid period,” he said.
While affordability will mean different things to different people, “the big standout” in New Zealand is “how heavily reliant we are on equity in the home as our key investment rather than a broader more diversified portfolio.”
That has started to change, in part because of the advent of KiwiSaver broadening Kiwis' range of investments.
The trade offs between investing in housing compared to other investments involve “endless complex” considerations including tax, interest rate offsets and supply of land.
Space is “the big one. It's either going up or out,” Orr said.
“It's the restraint of where people can build is the single biggest determinant on house prices. Any slight change in interest rates leads to an over-sized impact on price because of that constrained nature of housing.”