New Zealand’s central bank said it’s assessing how to curb lending to property investors to help slow a rampant Auckland housing market as low inflation makes raising interest rates inappropriate.
The central bank is reviewing options for a new asset class for residential investment mortgages as it examines so-called macro-prudential tools, Deputy Governor Grant Spencer said in the text of a speech Wednesday.
“While the pressures in the housing market would suggest a tightening of interest rates, the primary objective of monetary policy, CPI inflation, is projected to remain below its target range for some time,” he said. “Thus it would be inappropriate for monetary policy to lend assistance to the bank’s financial stability objective at this time.”
The central bank, which introduced limits on low-deposit mortgage lending 18 months ago, has said it’s concerned about Auckland, where a shortage of properties saw prices soar 20 percent in the year through March. It is unwilling to raise borrowing costs because the slump in oil prices and a firm New Zealand dollar have pushed inflation below its 2 percent target.
The currency dipped after the speech was released before recovering to buy 75.19 cents at 1:52 p.m. in Wellington, little changed today.
“The strength of the housing sector prevents the bank from delivering a ‘shock cut’ any time soon,” Annette Beacher, head of Asia-Pacific research at TD Securities Inc. in Singapore, said in an e-mailed note. If new tools to damp housing demand were brought in quickly and proved effective, “then perhaps the RBNZ could be in a position to ease much later in the year if the inflation outlook is still sub-2 percent,” she said.
Last month the central bank projected that borrowing costs will be unchanged through early 2017. It is forecasting that annual inflation slowed to zero in the first quarter.
House prices nationally rose 9.5 percent in March from a year earlier, the fastest since November 2013, according to Real Estate Institute figures.
Spencer said the strength of the housing market means “it would not make sense” to lift the restrictions on low-deposit mortgage lending in the near term. “To do so would invite a further surge in credit-based demand for housing,” he said.
The central bank on March 5 signaled it may tighten rules on lending to property investors to help curb demand. It sought views on how best to define property investment loans, which banks would be required to put into an asset sub-class and hold appropriate capital against.
Prime Minister John Key this week said using macro-prudential tools is “much better than blanket and wholesale rises of interest rates which wouldn’t be justifiable given where inflation is at the moment.”
The government is focused on increasing the supply of new houses, particularly in Auckland, by fast-tracking approvals for new developments. Spencer said new supply is “falling short of expectations” and needs to remain a priority.
He urged the government to give fresh consideration to the tax-preferred status of housing, saying many investors are attracted by untaxed capital gains.