Reserve Bank likely to use new tools within six months, NZIER says

Shamubeel Eaqub

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The Reserve Bank will likely use its new macro prudential tools within the next six months to cool Auckland's overheated housing market and follow up with interest rate rises, the New Zealand Institute of Economic Research says.

"The Reserve Bank will want to use and have to use macro prudential tools over the next six months," Shamubeel Eaqub, principal economist at the institute, said at a briefing in Wellington today.

"I don't think it's going to be enough on its own. From the beginning of next year, we expect the Reserve Bank to start raising interest rates, despite the fact that it's a very blunt tool. They can't allow the Auckland housing market to get away on them."

The bank has been looking at ways to cool the heating Auckland property market and keep tabs on the major residential rebuild in Canterbury without lifting the yield attraction of the kiwi dollar, which has been kneecapping exporters and local manufacturers who compete with imported rivals.

It will use its new tools in an attempt to limit new home lending rather than hit current borrowers, which could hurt the economy, Mr Eaqub says. The bank's new macro-prudential measures would allow it to restrict the level of low-equity home loans.

Mr Eaqub expects the bank to raise the 2.5 percent benchmark rate by 25 basis points in January, increasing it to 3.75 percent by the end of 2014.

The New Zealand dollar slumped to 49.23 US cents in March 2009 and has since surged to above 87 US cents, recently trading at 80.63 US cents.

"It will keep the kiwi high," Mr Eaqub says. He declined to forecast a level, however.

The Reserve Bank releases data on foreign currency positions and flows tomorrow that are likely to show the size of a recent intervention that governor Graeme Wheeler referred to at a select committee earlier this month.


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7 Comments & Questions

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Wouldn't it be better to implement a capital gains tax on investment properties instead of increasing interest rates?

Why put local business on the chopping block with a high exchange rate.

Slowing immigration would also be good. I don't understand why immigrants are continuing to walk off the street into my business and ask for work. Shouldn't they have work lined up?

I'm confused.

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You're confused because you believe the BS the left is spinning.

The problem is one of supply. Investment properties are a small part of the market, so it wouldn't make much difference to overall property prices but would drive up rents as it becomes more expensive, in effect, to hold a rental property which would inevitably be past on to the tenant. Not to mention it would be a nightmare to administrate.

If it's all down to "greedy landlords", why are the vacancy rates, according to the DBH, going down, indicating fewer rentals? More rentals would indicate a higher vacancy rate. It's about supply and it's artificial constraint. Has been for years especially in Auckland.

The immigrants probably don't have the luxury of going on the dole so that's why they probably need a job. If we had a limited dole you probably would have many more Kiwis asking you for a job, too.

You should hire an immigrant - they might be a very good worker.

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You either have capital gains tax or you don't. It can't be selective on the basis suggested. The left want a comprehensive capital gains tax with an exemption for the family home (difficult to administer). So, if you are worried about the impact of the exchange rate on local business then you should be worried about the hundreds of thousands of local businesses, including every farmer in the country, who would have to pay capital gains tax when they sell their businesses to retire. Similarly, everybody who invests for their retirement, whether in property or the share market, would have to pay capital gains tax on their retirement nest egg. A very bad idea that won't control the price of housing, based on overseas experience.

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No economic commentator has gotten it right calling rate cuts/raises as above predictions.
Global pressures will swamp any heady ideas Wheeler may have of considering raising interest rates thru 2014...sit tight and keep floating.

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Stormy, choppy waters ahead people ... steady on that tiller, drop the main sheet a little, JGB are imploding.

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The Auckland housing market has already got away from them!
Any measures now to cool the housing market will be too little too late.
Ordinary home buyers with big mortgages will be very badly burnt.
I am waiting for the major correction which will come within the next 15 months, probably after the election.

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How does raising interest rates cool the Auckland property market yet not have an effect on house values outside of Auckland where cooling is not required?

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NZ Market Snapshot


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