Oct. 3 (Bloomberg) -- New Zealand interest rates may rise faster than the central bank currently projects unless house-price inflation is brought under control, Governor Graeme Wheeler said.
The Reserve Bank of New Zealand last month forecast that the official cash rate would start rising from a record-low 2.5 percent next year. It expects the rate will increase to about 4.5 percent by early 2016, Wheeler said in an article on the central bank’s website today.
Wheeler has been reluctant to raise interest rates to curb a housing boom because that may boost the currency and hurt New Zealand’s economic recovery. This week he introduced limits on property lending when the loan-to-valuation ratio exceeds 80 percent to slow the fastest annual increase in house prices since early 2008.
“We are keen to see house-price inflation moderate significantly,” Wheeler said today. “If the loan-to-value speed limit is unable to slow house-price inflation, larger increases in the official cash rate would be required.”
New Zealand’s dollar, the best performer among 16 major currencies in the past three months, rose after the article was published. It gained 0.5 percent to 83.21 U.S. cents at 9:30 a.m. in Wellington.
House prices rose 8.5 percent in August from a year earlier, the fastest pace since January 2008, according to Quotable Value New Zealand, a government-owned property research company. In Auckland, home to a third of the nation’s 4.5 million people, prices surged 13 percent.
“Our concern is that excessive increases in house prices in parts of the country, if unchecked, pose increasing risk for the financial system and the broader economy,” Wheeler said. “High and rising house prices increase the risk and potential impact of a major correction in house prices, and consequential loss to lenders.”
The economy is not immune to a sharp fall in house prices if global growth slows sharply or if China’s financial system experiences major difficulties, Wheeler said. The article, entitled “Why Loan to Value Ratios Were Introduced,” was also published in the New Zealand Herald newspaper today.
From Oct. 1, only 10 percent of a bank’s new home lending can be at a loan to valuation ratio exceeding 80 percent. The bank considered applying the rules just to Auckland and also weighed up exempting buyers of lower-prices housing or first-home buyers who have most difficulty saving a 20 percent deposit, Wheeler said.
“Exempting low-priced housing would be a recipe for rapid increases in the cost of such housing,” he said. “Broad exemptions to other groups such as first home buyers would substantially undermine the effectiveness of the restrictions in reducing house price inflation.”
Last month, the RBNZ forecast annual house inflation would peak at 11 percent early next year, before slowing to 5 percent by early 2015.
“We are keen to see house price inflation moderate significantly and, in doing so, reduce the risks to the financial sector and the broader economy,” Wheeler said today. “Speed limits on low deposit lending are designed to help achieve this.”
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