Bank's LVR move the right one, economists say

In last week’s Financial Stability Report, Reserve Bank Governor Graeme Wheeler said the time was not right to lift the LVR rules.

“We have always indicated that the LVR restrictions are a temporary measure. However, there remains a risk of a resurgence in house price inflation, particularly in light of strong immigration flows. Consequently, we do not consider it appropriate to ease the LVR speed limit at this time.”

Westpac’s chief economist Dominick Stephens said he had been arguing for some time that a rebound in the market was virtually a sure bet.

“The latest data is starting to vindicate that view. The most fruitful avenue for understanding the year-to-year cycles in the housing market is to watch financial conditions, including interest rates. Late last year fixed mortgage rates rose sharply, and at the same the RBNZ restricted high-LVR mortgage lending. The housing market promptly slowed (to the consternation of those who exclusively watch physical factors like construction shortages). But over recent months fixed mortgage rates have fallen hard, and that is sure to provide a tail-wind to the housing market.”

He said despite falling mortgage rates and booming net immigration, the housing market slowed from July to September this year. “We argued that both buyers and sellers were holding back until after the election, and in Auckland, until new government valuations had been issued. The latest housing data supports that hypothesis. In October the seasonally-adjusted value of new mortgage approvals jumped 8%. New listings of houses for sale on realestate.co.nz jumped 12%, seasonally adjusted. And seasonally adjusted house sales were up 4.7%. We would expect the housing market to continue along its current, perkier path so long as fixed mortgage rates stay low. Eventually, that will culminate in a modest lift in the pace of house price inflation.”

ASB’s economists agreed, saying the newest REINZ data supported the decision to leave the rules in place.

“Even taking into account the ‘spring surge’, house sales rebounded strongly in October. As has been the trend over the past year, activity was particularly strong in Auckland and Canterbury. Against this backdrop of strong demand, housing supply remains very tight, which should maintain upwards pressure on house prices over the coming year – albeit at a moderating rate.”

BNZ chief econmist Tony Alexander said Auckland house price inflation had not slowed convincingly, the rest of the North Island was recovering, Christchurch looked to be picking up again and the South Island was settling.

“The case is not strongly made for house price inflation settling at a low level,” he said.

Other factors that could boost prices included that the election was out of the way,  mortgage rates looked set to stay low for some time, banks were increasingly competitive, migration was up, and consents for new dwelling were down.

“The Reserve Bank have calculated that the LVR rules are doing the job of 0.25% - 0.5% worth of increases in the official cash rate. Easing the rules now would be equivalent to easing monetary policy (though by a lesser amount in their estimation) which would not be consistent with their statement in the October cash rate review that ‘a period of assessment remains appropriate before considering further policy adjustment’,” Alexander said.

He said the Reserve Bank would likely want to see more evidence of a sustained suppression of house price inflation before backing away from the LVR rules.