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Wheeler warns on housing, holds OCR at 2.5%

Reserve Bank governor Graeme Wheeler singled out rising house prices as a threat to the country's financial stability and kept the official cash rate at 2.5 percent, as expected, saying the overvalued kiwi dollar was holding consumer prices below the bank's target band.

"The bank does not want to see financial stability or inflation risks accentuated by housing demand getting too far ahead of supply," Wheeler says in a statement. It is closely watching house price inflation and household credit growth, which it expects will get a boost from the Canterbury rebuild.

Mr Wheeler is facing increasing pressure to use macro-prudential tools, such as limiting loan-to-value ratios or increasing banks' capital requirements, to deliver looser monetary conditions and take some pressure off the strong New Zealand dollar.

The governor has been reluctant to accept this lobbying, saying the tools, which are still under construction, are to protect the country's financial stability, not influence monetary policy.

He is scheduled to deliver a speech to the Canterbury Employers' Chamber of Commerce in Christchurch tomorrow, entitled Improving New Zealand's economic growth. On Februeary 20 he will speak to the Employers' and Manufacturers' Association on export issues, including the impact of the exchange rate.

The strong currency is seen as the main cause of the consumers' price index tracking outside the bank's 1 percent to 3 percent annual target band for inflation, and is "directly suppressing inflation on traded goods" and "undermining profitability in export and import competing industries," Mr Wheeler says.

New Zealand's CPI unexpectedly shrank 0.2 percent in the final three months of 2012, taking the annual rate of inflation to 0.9 percent.

Mike Jones, currency strategist at Bank of New Zealand, says in a note before the release, the bank stepped up its currency trading in December, which marked "the resumption of the passive intervention the bank employed successfully through the 2008 period of currency strength" and that the Reserve Bank "believes the NZD is overvalued".

The Reserve Bank softened its expectation for a pick-up in inflation, saying it expects economic growth over the coming year to "slowly" bring the CPI back to the target 2 percent midpoint.

An improving global economy and lift in international market sentiment had also contributed to lower bank funding costs, some of which filtered through to local retail interest, Mr Wheeler says.

"On balance, it remains appropriate for the OCR to be held at 2.5 percent." 


Comments and questions

Looks like another year of warnings on house prices and no action!

Macro-prudential tools will not help reduce house prices if houses are being bought by non-residents (as speculated in the media).

Yep - most of my foreign friends buying for investment are cash buyers anyway.

This is all getting a bit silly, isn't it? The warning of house price inflation has been made for some time. The problem is nothing is 'apparently' being done by the bank to correct that and so people presumably are treating the warning as hollow. If one continues to say to a child 'naughty, don't do it or you will get into trouble' with no further action when the child ignores the threat/warning then it should be no surprise what happens - the activity continues. So, too, the house demand as an investment.

As it would cripple the recovery.

The housing boom is confined to Auckland (and Christchurch). There is no boom in provincial house prices so the majority of home owners will be wondering what the heck the governor is talking about when he says house prices are a threat to financial stability.

The problem is that Auckland (and then add in Canterbury) actually does represent the majority of house owners. Your comment about the provinces is correct. I don't think people are going to get worried about pricing while interest rates remain real low. People do not seem to be averse to being in debt throughout their working lives, which is a bit sad.

Then why is he sounding warnings? Because they are the two bigggest markets in the country! If Nelson and Napier were gunning ahead, then who cares?

"...the bank stepped up its currency trading in December... " sounds like RBNZ is back in the market. I wondered where those powerful overnight kiwi dollar sell-offs were coming from.

Since December the RBNZ will have lost a lot of money punting on a lower dollar. Maybe they would be better off just printing the wretched stuff and flooding the markets with it. That is what they are competing with, after all.

If house prices had been controlled by the government several years ago using various instruments at their disposal, then the Reserve Bank could safely reduce interest rates today.

Wheeler talks about tools to protect the country's financial stability.
Where has he been? It is too late. The horse has bolted. The house prices escalated since year 2000. Financial stability is being stage managed or manipulated to prevent a melt-down of house prices to their true value. Yes. The market is the market but it is an ignorant buyer market. If land agents tell people to buy now, the buyers gullibly accept it. That is not a truly informed market.
What is really needed is some consumer protection against market manipulation and government incapability. Some consumer financial literacy would help. The foreign, including Chinese, buyers may be at the biggest risk of a financial correction. Most other countries have suffered a correction in house prices. Why is NZ still deferring apart from manipulation of the market.

The governor should raise the OCR immediately and keep on raising it to choke off the housing bubble. What's the point of telling people to save when they get a negative return after tax on term deposits. That's why productive savings are going into housing. Tax-free capital gain, low interest rates, high rents.
The bubble will burst sooner rather than later and the banks will be the owners of a large number of houses as the owners are upside down on their equity.
TDs should be at least 7% for 12 months.

Let it burst!
I wouldn’t want to have my money in TDs if and when that happens, though.

But you are right, there are far too many incentives to put money into housing as opposed to other investments.

What other, relatively secure, investments are there in NZ?

Real estate gets no special treatment. There is no more incentive to invest in property than there is in shares or any other growth assett, in spite of much ill-informed comment.

Real estate does get very special treatment by the banks.
You can go to a bank with 50k to your name and borrow the balance for a 1mil house, no worries. Try going to the bank with 50k and borrow the balance for a 1mil business or 1mil of shares.
This is endorsed implicitly by the Reserve Bank's actions or lack of.

Of course, you can borrow huge amounts for a house. It's less likely to go out of business and be left with bad debt. How many houses go under and have to lay off staff? None.

People will just fix to nullify any further OCR increases - so any burst will take some time.

The Reserve Bank who cried wolf.

Wheelin' out the same fable, again.The RBG's doing an impersonation of a scratched record. And he gets paid?!

Floating versus fixed rates are already far too high: 2%-3% higher than they should be.