New Zealand’s central bank Governor Graeme Wheeler is considering Chinese-style lending restrictions to curb a housing boom as weak economic growth and a surging currency rule out economy-wide interest rate rises.
In Auckland, home to a quarter of the nation’s 4.4 million people, demand fueled by mortgage rates near a record low saw a rundown bungalow last month sell for NZ$1.05 million ($861,600), or 2 1/2 times the average New York home. Prices nationally rose 6.3 percent in the year ended Feb. 28, the most since March 2008, according to a government-owned property research company.
Wheeler, who kept the benchmark interest rate unchanged at a record-low 2.5 percent yesterday, is considering raising home-buyers’ minimum deposits and tightening restrictions on bank balance sheets to ward off the risks of a property bubble. He’s set to join counterparts from China to Canada in using such tools rather than raising borrowing costs, which would stoke demand for a currency that’s jumped 59 percent in four years.
“With housing picking up over the past 12 months and the currency near its highs, the RBNZ is under pressure from various sources to move more quickly on this stuff,” said Darren Gibbs, New Zealand chief economist at Deutsche Bank AG in Auckland and an ex-Reserve Bank of New Zealand analyst.
Wheeler, a former managing director of the World Bank, returned to his homeland in September to take the reins at the RBNZ amid calls from the opposition to take pressure off the currency. Six months into the job, he’s starting to stamp his authority.
In the past five weeks he has picked former Treasury Department colleague Geoff Bascand as a deputy, said he’ll form a new committee to discuss key policy decisions, and laid out the potential prudential measures. Yesterday, he said he expects to keep the key rate unchanged through the end of the year and is prepared to lower the benchmark rate if the currency rises more than the economy justifies.
Wheeler “is perhaps more hands on,” said Robin Clements, chief New Zealand economist at UBS AG in Christchurch. “It looks like there’s more will to have something there and to be seen to be trying to do something different.”
The central bank has “tunnel vision” because of its inflation focus, opposition Labour Party finance spokesman David Parker said yesterday. He’s in favor of adopting the prudential tools and wants the RBNZ to also target the currency and employment.
As well as helping the RBNZ manage the housing cycle without adjusting the benchmark rate, the prudential measures will help it take steps to ensure the integrity of the banking system and protect it from a sudden reversal in property prices.
The RBNZ faces policy “trade-offs” as an interest rate cut would help low inflation return to target sooner, but would also exacerbate strength in house prices and risk pushing up private debt levels, John McDermott, assistant governor and head of economics, said in a speech in Wellington today.
“In the near future, macro-prudential measures will be part of the toolkit for responding to financial stability risks,” he said. “These measures will generally support and complement our efforts to stabilise inflation with monetary policy, as upswings in the macroeconomy often coincide with increasing asset prices and leverage.”
Given the elevated exchange rate, the “last thing” New Zealand needs is “a housing price bubble that gets out of control,” Wheeler told a parliament committee yesterday. “That’s one of the reasons why we’re moving quite fast on the macro-prudential instruments.”
The RBNZ on March 4 sought submissions from banks on the prudential tools and said it wants to reach an agreement with the government on how to use them by mid-year. They include proposals to mandate funding ratios, capital buffers, and specify minimum loan-to-property value levels.
Wheeler’s concern is that low interest rates and other incentives will spark excessive borrowing at a time family balance sheets are already stretched. Household debt was 142 percent of income at September, according to RBNZ figures.
ASB Bank Ltd., wholly owned by Commonwealth Bank of Australia, this week began offering NZ$500 cash plus a Sony Corp. 42-inch television valued at NZ$1,200 for new loans of NZ$100,000 or more.
Median prices in Auckland have increased 14 percent the past year to a NZ$535,000, the Real Estate Institute of New Zealand said this week. The suburban bungalow that attracted almost twice that price came with 940 square meters of land. Average New York prices were $346,100 in January, according to the Zillow Inc. home value index.
“If we started to see across the board housing strength in the second half, not just Auckland, we’d be a sitting duck for some sort of regulatory hand from the RBNZ hitting us before the end of 2013,” said Cameron Bagrie, chief economist at ANZ Bank New Zealand Ltd., the nation’s largest lender.
China has since April 2010 moved to stamp out speculation in the property market by raising the down-payment requirement on first mortgages, ordering a minimum 60 percent deposit for second-home purchases and an increase in rates for second loans. Sweden and Canada have employed restrictions on loan-to-value ratios aimed at curbing demand for credit.
Elsewhere in the Asia-Pacific region, Singapore’s retail sales fell 2 percent in January from a year earlier, while home sales plunged 65 percent in February after the government introduced its seventh round of cooling measures in January. In the Philippines, unemployment climbed to 7.1 percent in January, government statistics showed.
Euro-area inflation probably accelerated from a month earlier in February, economists surveyed by Bloomberg predicted. Spain is scheduled to report labor costs data for the fourth quarter.
U.S. consumer prices may have risen at a faster pace from a month earlier in February, a Bloomberg survey showed. An index of manufacturing activity in the New York region in March probably held near the highest since May 2012.
Price pressures in New Zealand are set to intensify, making rate increases after this year a possibility, as a squeeze on resources from rebuilding of earthquake devastated Christchurch fans inflation. The nation’s third-largest city is attracting tradesmen, curbing the pace of new building elsewhere, particularly Auckland where a shortage of new homes is helping push up property prices.
“The fundamental problem in housing is a supply deficiency,” said Stephen Toplis, head of research at Bank of New Zealand in Wellington. “We need prices to rise to encourage building, but then people could start re-leveraging off those increasing valuations. It’s a really nasty situation for the bank.”