Housing risks require a broad policy response

Growing imbalances in the housing market require policy action on a number of fronts, Reserve Bank Deputy Governor Grant Spencer said today.

Speaking to the Wellington Branch of the New Zealand Institute of Valuers, Mr Spencer said that a range of factors had contributed to strong demand for housing, including record low interest rates, rising credit growth, and population increases.

“While housing demand has been strong, the housing supply response has been constrained by rigid planning and consent processes, community preferences in respect of housing density, inefficiencies in the building industry, and infrastructure development constraints around financing and resource consents.

“House price pressures have re-emerged in Auckland following an easing in late 2015 and have also strengthened across other regions.

“The longer the boom continues, the more likely we will see a severe correction that could pose real risks to the financial system and broader economy.”

Mr Spencer said a broad range of initiatives is necessary to increase the long-term housing supply response, particularly in Auckland, and to help ensure housing demand is kept in line with supply capacity.

“The Reserve Bank has no direct influence over supply, but can influence housing demand through the credit channel. In this regard, we see theReserve Bank as part of a team effort.

“A dominant feature of the housing resurgence has been an increase in investor activity, which increases the risk inherent in the current housing cycle.

“The Reserve Bank is considering tightening Loan-to-Value Ratios (LVRs) further to counter the growing influence of investor demand in Auckland and other regions, and to further bolster bank balance sheets against fallout from a housing market downturn. Such a measure could potentially be introduced by the end of the year.

“Limits on Debt-to-Income ratios (DTIs) might also have a role to play but would be a new instrument that would have to be agreed by the Minister of Finance under the Memorandum of Understanding on Macro-prudential policy. Further investigation of this option will be undertaken.”

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