Migration may not drive prices as much as expected: RBNZ

In its latest Monetary Policy Statement, released today when it hiked the official cash rate by another 25 basis points, the Reserve Bank said it was expecting an increase in net immigration over the coming years.

Net immigration increased to an annual inflow of about 34,000 people in April, up sharply from about 5000 the year before. The Bank included a scenario of a rise to net migration of 45,200 by the middle of next year, which it said could add four percentage points to house price inflation and boost short-term interest rates.

But it said the biggest contributor to the increase in net immigration over the past year was a change in the migration flows of New Zealand citizens, not a large lift in foreign citizens moving to this country. “The level of departures of New Zealand citizens has fallen by about 17,000 over the past year and is currently at low levels compared with history.”

At the same time, there had been a more modest increase in the number of New Zealanders returning from overseas, it said.

“Research by the Bank has found that a given reduction in departures from New Zealand has less of an effect on housing demand and house price inflation than an equally-sized increase in the number of people arriving in New Zealand.”

The MPS said momentum in the housing market had eased since the middle of last year.

“Annual house price inflation fell to 9% in the December quarter, following the introduction of restrictions on high loan-to-value ratio mortgage lending and the beginning of mortgage rate increases.”

It said house price inflation was expected to continue moderating over the next three years because of higher interest rates and household debt. Increasing construction in Auckland and Christchurch was likely to also play a part.

The Bank said it was still unclear how households would respond to higher interest rates, after a period where they had been very low. “The movement of borrowers from floating-rate to fixed-rate mortgages may help insulate some borrowers from rising interest rates.”

BNZ’s economists said the recent increased speed of change to fixed-rate mortgages was one of the reasons the Reserve Bank remained relatively aggressive today.