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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 attention.
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 balance sheets.''
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 said.
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 coming months.
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