Are more housing market curbs on the agenda?

Auckland’s reinvigorated housing market, along with the ongoing strength of regional markets, has left economists suggesting further Reserve Bank restrictions could be on the way.

During the media conference for the March 10 OCR announcement, Reserve Bank Governor Graeme Wheeler said they were not considering anything on macro-prudential policy at this point.

A Reserve Bank spokesperson today said those comments were the Reserve Bank’s most recent position on the matter.

However, the Reserve Bank’s silence is unlikely to stop the speculation.

ASB chief economist Nick Tuffley has little doubt that, behind the scenes, the Reserve Bank is looking at a number of measures to address potential risks to financial stability.

Auckland’s house price to income ratio is getting increasingly stretched and that means the economy is increasingly vulnerable should a sharp price correction occur, he said.

At the same time, New Zealand’s ongoing low inflation is also an issue. While yesterday’s CPI data showed inflation levelling out, it remains low.

This all leaves the Reserve Bank with a financial stability dilemma, Tuffley said.

“The low inflation means it should really be dropping interest rates a bit further. But that would be likely to add more fuel to the fire of the housing market.”

One way of damping down housing demand would be to introduce further lending restrictions.

Tuffley said it would be easier for the Reserve Bank to modify existing restrictions rather than introduce new macro-prudential policy like debt-to-income ratios which were touted last year.

He suggested that one option could be for the Reserve Bank to lift the Auckland investor deposit requirement from 30% to 40%.

Or, alternatively, it could broaden the investor restrictions later in the year from “Auckland only” to nationwide.

The odds of further macro-prudential measures are increasing by the day, ANZ chief economist Cameron Bagrie agreed.

“We note increasing chatter domestically on this front and we do feel there is inevitability about it.

“The Reserve Bank has a price stability mandate; that is paramount. But it also has a financial stability one and sometimes the two clash, as is the case right here and now.”

He thought extending current Auckland investor LVR restrictions to all investors, and requiring a 30% deposit no matter where they were buying, would be a logical first step – although something wider reaching couldn’t be ruled out.

“The Reserve Bank does have the ability to increase risk weights on sectoral lending or to introduce the counter-cyclical capital buffer.

“But if they really wanted to settle the investor and speculative side of the housing market down – and we think that's in the economy's medium-term interest – it should limit the amount of interest-only borrowing.”

Massey University banking expert David Tripe said it wouldn’t be a bad thing for the Reserve Bank to introduce further macro-prudential policy.

“Whether they will or not is another matter as they seem to have forgotten what they are there for.”

But, in his view, it isn’t house prices per se which are the problem – rather it is people getting overly-enthusiastic about borrowing and the risks that can come with that.

The Reserve Bank’s next Financial Stability Report, which is due May 11, is expected to provide further insight on the issue.