RBNZ `Seriously Looking' at More Policies to Curb Housing Boom

  • Reserve Bank says financial stability risks have increased
  • New Zealand dollar rises after Financial Stability Report

New Zealand’s central bank said it is looking at additional lending restrictions to help curb the nation’s booming housing market.

“It’s fair to say we’re seriously looking at macro-prudential” policies, Reserve Bank Governor Graeme Wheeler said at a news conference Wednesday in Wellington following the release of the semi-annual Financial Stability Report. There is no specific timetable for introducing extra restrictions because the bank is still doing its analysis and needs to consult with the government, he said.

Wheeler last month cut the official cash rate to a record-low 2.25 percent and said further easing may be required as inflation undershoots his 1-3 percent target. At the same time he’s wary that lower borrowing costs could further stoke housing demand, posing a risk to lenders and the financial system if there was a sudden collapse in property prices.

The New Zealand dollar rose as much as 1 percent after publication of the RBNZ’s report, which damped speculation that new restrictions could be announced as soon as today. It bought 68.21 U.S. cents at 12:32 p.m. in Wellington.

Policy ‘Tension’

“With no added macro-prudential policy imminent, tension will remain for the time being between the monetary policy and financial stability objectives,” said Nick Tuffley, chief economist at ASB Bank in Auckland. “In the short term this may continue to temper the RBNZ’s willingness to cut the OCR much further.”

The RBNZ in 2013 put a limit on the amount of low-deposit home lending banks could undertake, and on Nov. 1 last year it specifically targeted Auckland investors, who it estimates are responsible for more than 40 percent of purchases in the city. It now requires them to hold a deposit of at least 30 percent of a property’s value to get a mortgage.

The bank said today that further limits on the so-called loan-to-value ratios are an option, while it is also assessing how restrictions on debt-to-income levels could help quell demand. At the moment, debt-to-income ratios are not a tool available to the RBNZ under its memorandum of understanding with Finance Minister Bill English.

Rising Prices

“If we were going to move in that direction we would need to bring them into the MOU, and discuss that with the minister,” Deputy Governor Grant Spencer said at the news conference. “So it’s not quite at the same state of readiness as the other instruments.”

He declined to say what the central bank’s preference would be, and said any new measures could be applied specifically to Auckland or nationwide.

The housing market is picking up after a brief lull, with prices nationally rising 12 percent in April from a year earlier, according to Quotable Value New Zealand, a government property research company. That’s the first acceleration since November.

The lending rules already introduced -- and new government regulations implemented Oct. 1 to tax capital gains on property held for less than two years -- helped slow the Auckland housing market late last year. Since then prices have picked up again, rising 1.5 percent in the three months ended April to a record average of NZ$942,760 ($640,134.)

Auckland Stretched

“Auckland prices remain stretched relative to incomes and recent data suggest that price pressures are re-emerging,” the RBNZ said. “House prices have also begun increasing strongly in a number of regions across New Zealand.”

Reducing the imbalance between housing demand and supply in the Auckland region is essential if house price appreciation is to be contained over the longer term, the central bank said. It said it remains concerned that a future sharp slowdown could challenge financial stability given the large exposure of the banking system to the Auckland housing market.

“We think it is likely that Auckland house price gains will prompt the RBNZ to act in coming months,” said Tuffley. “Any future tightening up of loan-to-value ratio restrictions is likely to be Auckland focused rather than nationwide.”

The RBNZ said the dairy industry remains under pressure as prices remain low. Fonterra Cooperative Group, the world’s biggest dairy exporter, has cut its milk payments to New Zealand farmers to a nine-year low as a global glut and weak demand from China weighs on world prices.

“Many farmers now face a third season of negative cash flow with heavy demand for working capital,” the central bank said today. “Problem loan levels are expected to increase significantly over the coming year, although losses in the banking sector are likely to be absorbed mainly with profits.”

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