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RBNZ sees strong house price inflation lasting longer

RBNZ sees strong house price inflation lasting longer than it thought

By Paul McBeth

Dec. 12 (BusinessDesk) - The Reserve Bank expects the country’s strong house price inflation to persist for longer than it previously thought as low interest rates, rising net migration and a supply shortage continue to drive the market.

New Zealand house prices have increased 18 percent in the past two years, driven largely by a lack of supply in the country’s two biggest cities Auckland and Christchurch, and prompting the Reserve Bank to impose restrictions on the level of high loan-to-value ratio lending banks can write as a means to stifle demand. Governor Graeme Wheeler wants to discourage riskier lending, which could put the financial system under stress if the economy was hit with an unexpected shock.

The bank expects to trim between 1 and 4 percentage points from the pace of house price inflation within the first year of implementation, though migration pressures and low interest rates mean it now sees strength in the market lasting longer than it predicted in September.

“Quarterly house price inflation is expected to remain at around current levels in early 2014,” the bank said in its monetary policy statement.

As the LVR restrictions kick in, net inbound migration ebbs and interest rates rise, that pace of growth is expected to slow.

The fear for the Reserve Bank is that house price inflation persists and households react by increasing consumption, putting upwards pressure on consumer prices and meaning the bank would have to raise interest rates faster.

The Reserve Bank expects demand for housing will cool when it lifts the benchmark rate next year, particularly if people are basing current buying decisions on the view that rates will stay lower for longer.

When the bank does start tightening monetary policy, it will likely have a staggered effect on home lenders, with borrowers continuing to switch to fixed rates, though largely for one-year terms.

At the end of October, about 43 percent of mortgages were on floating rates, down from 56 percent a year earlier. Another 30 percent of borrowers are on one-year terms.

Borrowers switched out of fixed rates in the wake of the global financial crisis, as New Zealand’s central bank joined the world in slashing interest rates, making it more attractive to go on a floating rate.

Past governor Alan Bollard was caught out during the 2000s housing boom as he hiked the official cash rate as high 8.25 percent in late-2007, but couldn’t get the traction he needed to cool the market with borrowers taking out long fixed loans.

(BusinessDesk)


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