Wheeler seeks ‘soft landing’ for property market

Hopes to cushion the landing for over-heating Auckland and Christchurch property markets in an effort to avoid the pitfalls seen in the US.

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.


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