Wheeler seeks ‘soft landing’ for property market

Graeme Wheeler

Reserve Bank governor Graeme Wheeler is trying to cushion the landing for the country's over-heating property markets in Auckland and Christchurch in an effort to avoid the pitfalls seen in the US.

The RBNZ is consulting with banks on the implementation of macro-prudential policy, which would require them to carry more capital on their balance sheet or restrict the extent of their low equity residential lending. It got government approval to use the tools last month.

"I don't think I would call them unorthodox," Mr Wheeler said in response to a question at Parliament's finance and expenditure committee. "They're seen as an important complementary tool that central banks or monetary authorities should have."

While the international research on the tools is not extensive, he said they can have some impact in trying to reduce the rate of housing price increases without being a complete panacea. If the tools are rolled out, that should limit how high interest rates will need to go as a shortage of property fuels rising prices.

The bank today left the official cash rate at its record-low 2.5 percent and does not expect to start hiking rates until the middle of next year, though it signalled more aggressive increases in 2015.

Mr Wheeler is hoping to guide New Zealand away from the same path the US went down after the global financial crisis, when house prices slumped, leaving millions of homeowners in negative equity, where the value of their mortgage was worth more than their property.

When asked whether he was trying to manage a soft landing in the housing market, Mr Wheeler said that was a "fair comment". His monetary policy statement this morning said current house price inflation "is increasing the probability and potential harm of a significant downwards correction".

The bubbling property market is one of two competing tensions for Mr Wheeler when he reviews monetary policy, with its potential to fuel debt-driven consumer spending if households feel wealthier, especially because of the dampening effect of an "over-valued" kiwi dollar on the price of imports.

That is in spite of the kiwi's 6 percent fall on a trade-weighted basis since the last OCR review in April.

Chief economist John McDermott told reporters earlier in the day that those risks are evenly balanced. The central bank broke out analysis in today's release of the June monetary policy statement as to what would occur if either escalated more than expected.

If the trade-weighted index appreciates in the coming three months and stays outside the bank's projections, the 90-day bank bill rate, seen as a proxy for the benchmark official cash rate, will fall below 2 percent next year.

The bank ramped up its projection for the trade-weighted index by about 200 basis points for the currency, seeing it average 77.5 in the June quarter this year, falling to 73.1 at the start of 2016. It recently traded at 73.49.

Alternatively, if house price inflation peaks three percentage points above the base case at 14 percent and stays higher, that would likely mean increased domestic demand, leading to a steeper forecast track for 90-day bank bill rates, rising to about 1 percentage point higher than forecast, at 5 percent.

(BusinessDesk)

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In my view, Russel Norman is a far greater risk to the NZ economy than runaway Auckland house prices...

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Agree entirely. Many average Kiwis think what Norman and Shearer say is for domestic consumption, but the reality is that overseas banks and investment funds also listen to the policy. NZ being short on local savings to fund business relies on the external capital and simply due to NZ's small size relative to other safe jurisdictions. Any withdrawal (that is happening now in the power sector) results in a massive loss of wealth for all Kiwis.

To replace the funds, yep, we borrow more, and to reflect the risk (political) the externals demand higher interest rates. Again, all Kiwis pay the price in credit cards, mortgages, business loans, higher rents.
And the cause can be traced to the pontificating of extreme left politicians who believe the government should take over every business that doesn't help those who won't put in the effort to help themselves. Policies such as setting national power prices, building everyone a home, a living wage for city councils, three square meals a day for all children, no mining anywhere, no exploring for oil or gas, we need more money so let's print some.

One bright spot is that as the policies get more extreme some journalists and media are starting to hold the flame to Norman's and Shearer's feet. The question then becomes who will dance with Winnie? Better start looking for baubles and limos.

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Exactly. House prices in Auckland simply reflect to many trying to live in a concentrated area - known as supply and demand, and nothing Mr Wheeler or anyone else does will make a difference. It will run out of steam at some level all by itself. The fact that Russel Norman chose to leave Australia is probably why it became known as the lucky country.

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Actually, Mr Wheeler can make a difference by utilising the LVR tools to increase borrowing costs for some, thereby pricing them down or out of the market. Unlikely to make a major difference, but may take the edge off.

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As the increases are only applicable to the central Auckland suburbs and Christchurch, for obvious reasons, why don't they alter the basis of assessing the data. If you agree that all of Christchurch is affected and about a third of Auckland is affecting the data and this equates to say a population of 600,000 (Christchurch 350,000 and central Auckland 250,000 - national population 4.5m), then that is only 13% of the population.

Why should the other 87% of the population be penalised with no more high LVR loans ?

I say adjust the survey and allow for this. Let the people who want to pay silly prices in central Auckland do just that. If they can survive paying the mortgage, good luck to them. If they can't, bad luck.

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Governments should legislate loan-to-value ratios on a sliding scale. Higher ratios at the lower end of the market and lower at the higher end.

This is based on a well-known fact that higher prices properties fall the most in percentage terms during hard times. This would avoid the finance company fiasco of the past and also encourage people to save more, instead of trying to create the false illusion of grandure.

Most importantly, it would put a curtain on wreckless lending by finance institutions only interested in a short-term buck. Let's be real here, there are no wins out of boom-bust cycles!

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Brilliant idea - it would allow the normal Joe Blow to get into the market at the bottom and also protect those at the top end as it is more likely that there is more chance of those at the top with million dollar houses falling off the perch than those will houses valued at $300,000 to $600,000.

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