RBNZ: house prices still near top of sustainable levels

“House prices remain a stretch for many prospective buyers and are hovering around the top of our estimate of sustainable levels,” says Kerry Watt, RBNZ's director of financial stability assessment and strategy in a preview of the central banks financial stability report due to be released next week.

Watt's comments come after many months of RBNZ saying house prices had returned to sustainable levels.

The latest Real Estate Institute data showed that house prices in September nationwide were 15.8% below the November 2021 peak. While that's down from the 16.7% decline from the peak in Augusts, house prices were down 0.4% in the year ended September.

“Banks are currently facing competitive pressures to attract a limited pool of creditworthy borrowers,” Watt says.

Borrowers' capacity to take on more debt is rising as RBNZ cuts interest rates, he says.

RBNZ cut its official cash rate to 4.75% from 5.25% on Oct 9 and is widely expected to cut at least another 50 basis points when it releases its latest monetary policy statement later this month.

“The weaker economic environment means households are exercising caution. The level of interest rates is still high by recent standards and lending growth has been low over the last year,” Watt says.

“It is uncertain when and by how much demand for new borrowing will pick up.”

Although the recent house price cycle has been rapid compared to overseas examples, there has been comparatively less stress on the financial system than elsewhere, “demonstrating the robustness of our institutions and regulatory frameworks.”

Households are continuing to show resilience following the significant rise and then fall in house prices in the last four years.

Government policies underway to increase long-term supply of housing and better supply responses to housing demand will help to moderate future house cycles and improve housing affordability.

Watt says RBNZ's debt-to-income restrictions on bank borrowing introduced earlier this year will also play “an important role” in moderating demand cycles and reducing the buildup of risks.”

Watts notes that understanding housing market dynamics “is crucial” for RBNZ because home loans make up more than 60% of total bank lending and residential property accounts for more than half the wealth of NZ households.

Thus housing “directly influences financial stability, affects consumer confidence and shapes economic growth.”

The ANZ-Roy Morgan consumer confidence index was down four points in October at 91.2 and that followed three months of improvement – a level of 100 shows consumers are neither pessimistic nor optimistic.