The housing market has unsettled the Reserve Bank, with
governor Graeme Wheeler specifically mentioning house price
inflation and household credit growth in his Official Cash
Rate review yesterday. The bank did not want to see financial
stability or inflation risks accentuated by housing demand
getting too far ahead of supply, he said.
Mr Wheeler kept the OCR unchanged at 2.5% but his comments
were more hawkish than the market expected.
While adopting a more positive view of the global economy, it
was his comments around the housing market which took most
BNZ head of research Stephen Toplis said the Reserve Bank
could not have been blunter about the housing market.
''In our opinion, the excesses in this market will build
further. This will keep the central bank firmly on a
tightening bias, resulting in an eventual increase in the
cash rate later this year.''
It was important to note that not only was the bank worried
about the inflationary impact of an overheating housing
market, but it was also increasingly concerned by the risk
that posed to financial stability, he said.
''In short, it is believed that house prices are becoming
increasingly overvalued and that in the event they correct to
more sustainable levels, this might put pressure on bank
It was for that reason the Reserve Bank was, in consultation
with the Treasury, investigating alternative methods of
controlling the housing market, Mr Toplis said.
In the current environment, where a paucity of supply seemed
to be the driving force of the excess demand, it was unlikely
that even prudential policy would contain the inflation that
was building in the sector.
Housing inflation in itself might not be problematic for more
generalised inflation but it would become so if households
again started to borrow against the increased value of the
housing stock, he said.
''We think housing-related issues will be the No 1
consideration to monitor over the course of 2013,'' Mr Toplis
Westpac chief economist Dominick Stephens welcomed the
Reserve Bank's change of view.
''Our key view over the past year has been that so long as
interest rates remain low, house prices would rise
aggressively. We have long expressed concern about the
potential for rising house prices to unbalance the economy.''
Market reaction suggested it was of modest surprise on the
hawkish side. The New Zealand dollar rose around half a cent
against both the Australian and United States currencies.
Given the combination of the Reserve Bank's stance and the
ailing Australian economy, there is now a risk of substantial
further rises for the Kiwi against the Australian dollar in
Council of Trade Unions economist Bill Rosenberg said the
Reserve Bank also acknowledged the exchange rate was
overvalued and was hitting exports and import-competing
firms, and of another house price bubble.
That called for innovative policy which targeted house prices
and the exchange rate rather than price increases in general.
Raising interest rates would push the exchange rate higher
and stifle investment and job creation. The Reserve Bank
should be using macro-prudential policies that directly
targeted house prices. At the same time, the Government
should be increasing the supply of low cost housing designed
for first-home buyers so they did not get disproportionately
hit by those policies, Mr Rosenberg said.
What they said
"Prime Minister John Key and Finance Minister Bill English
have their heads in the sand if they believe the Reserve Bank
should focus on its monetary policy solely on inflation.
Inflation isn't a problem in New Zealand and hasn't been for
years, unlike our overvalued dollar which is seriously
hurting manufacturers, exporters and regional economies." -
NZ First leader Winston Peters
"By not cutting the OCR today, [Reserve Bank governor] Graeme
Wheeler is helping to wreck our export and manufacturing
sectors and the valuable jobs they create. A lower OCR would
have taken pressure off our overvalued exchange rate, helping
exporters and manufacturers who compete with imports. Simply
talking about our overvalued dollar is no longer enough." -
Green Party co-leader Russel Norman
At a glance
• OCR kept at 2.5%
• House prices under watch
• Dollar up on announcement
• Warmer view of global economy