Photographer: Brendon O'Hagan/Bloomberg

RBNZ Sees Risk of 'Damaging Correction' in Auckland Housing

Updated on
  • Closely monitoring surging house prices in Hamilton, Tauranga
  • Also cites dairy slump as source of increased financial risk

Auckland’s soaring housing market and low milk prices pose increased risks to New Zealand’s financial system, the country’s central bank said.

“The increasingly stretched Auckland market is at risk of a damaging correction, especially if economic conditions deteriorate,” the Reserve Bank said Wednesday in Wellington in its semi-annual Financial Stability Report. Many indebted farms are also coming under increased pressure, “which would be exacerbated if low dairy prices are sustained or dairy farm prices fall significantly,” it said.

Governor Graeme Wheeler has cut the official cash rate three times this year as the slump in milk prices curbs economic growth and damps inflation. At the same time he’s wary that lower borrowing costs could further stoke housing demand in Auckland, where the central bank estimates prices rose almost 27 percent in the year to September.

“The strength of housing will be one factor the RBNZ bears in mind when making near-term OCR decisions,” said Nick Tuffley, chief economist at ASB Bank in Auckland. “But with the inflation outlook extremely benign in our view, and house sales falling sharply over October, we still expect a 25 basis point OCR cut in December.”

Lending Curbs

The New Zealand dollar fell after the RBNZ’s comments, before recovering to trade little changed at 65.33 U.S. cents at 10:15 a.m. in Wellington.

The RBNZ on Nov. 1 tightened lending rules for Auckland residential property investors, requiring them to have a deposit of at least 30 percent for a mortgage. Capital gains on New Zealand property held for less than two years will also be taxed under new government rules implemented Oct. 1.

Latest data suggest those measures are starting to curb demand in Auckland, where prices have surged amid a housing shortage and record immigration. Sales in the nation’s largest city fell 19 percent in October from September, the Real Estate Institute of New Zealand said yesterday. Auckland’s median house price fell 3 percent from September to NZ$748,250 ($489,000).

The central bank said in today’s report that the tighter lending rules for investors are expected to reduce Auckland house-price inflation by as much as 4 percentage points over the coming year. It is also closely monitoring strong house-price gains in nearby areas including Hamilton and Tauranga.

Auckland house prices now exceed nine times the income of residents, making the city one of the most expensive in the world, the RBNZ said.

Wheeler left the official cash rate at 2.75 percent last month but said then that further easing “seems likely.” While he declined to comment on monetary policy today in a press conference, the bank said slowing growth in China and the potential for drought from the El Nino weather pattern also pose risks to the outlook.

(Updates with economist's comment in fourth paragraph.)
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