Wage, price pressures ‘inevitable’ as Auckland, Christchurch drive building boom, RBNZ says

The building boom looming in Christchurch and Auckland in the next three years will inevitably put upward pressure on wages and prices in the construction sector and could spill over into general inflation, driving up interest rates and the kiwi dollar, the Reserve Bank says.

The building boom looming in Christchurch and Auckland in the next three years will inevitably put upward pressure on wages and prices in the construction sector and could spill over into general inflation, driving up interest rates and the kiwi dollar, the Reserve Bank says.

The Auckland Housing Accord aims to free up enough land for 39,000 homes in the next three years, while 12,000 new homes that may be built in Canterbury in the same period.

To achieve that, new dwelling construction would need to be 9 percent higher than at the height of the recent housing boom, even assuming no growth in the rest of the country, deputy governor Grant Spencer told a Property Council meeting in Auckland.

"The upward pressure on construction costs that we are currently seeing in Canterbury may well extend more broadly across the industry," Spencer said. At a moderate pace that would draw resources to the construction sector though if excessive, "this would risk spilling over into general inflation and put upward pressure on interest rates and the exchange rate."

Spencer made the comments in a speech titled 'Trends in the New Zealand housing market', which sought to explain the risks to the economy posed by growing pressures in the housing market, particularly in Auckland and Christchurch, and the reasoning behind the speed limits on low deposit lending.

He noted that household balance sheets and the New Zealand economy fared relatively well in the downturn that followed the global financial crisis because house prices only fell about 10 percent, compared to declines of 30 percent to 40 percent in the US, Spain and Ireland.

But "vulnerabilities" built up in the 2000s housing boom had not fully unwound, and household debt and house prices "both remain elevated relative to international and historical norms," he said. From a high starting point, house prices "are now rising rapidly once more."

Restrictions on high loan-to-value mortgages imposed from Oct. 1 are estimated to have the same dampening effect on demand as about 30 basis points of increase in the official cash rate, Spencer said. They could also reduce the extent of OCR hikes and exchange rate pressure in the coming economic cycle, he said.

The Reserve Bank estimates the LVR restrictions will reduce mortgage credit growth by 1-to-3 percentage points over the first year, trim home sales by 3 percent to 8 percent and trim house price inflation by 1-to-4 percentage points.

But the underlying housing market is likely to remain strong, Spencer said.

"New Zealand house price levels will remain high on most metrics, for example relative to incomes and rents," he said. "In this sense it is hard to see how these restrictions will materially reduce the existing incentives to develop new residential property."

He said supply and demand are likely to come back into balance "in due course", especially as interest rates return to more normal levels, allowing the central bank to lift its LVR restrictions.

The bank will be assessing house price inflation, mortgage approvals, credit growth and house sales in making a judgement about when the restrictions could be removed, he said.

Traders expect the central bank will lift the OCR by about 77 basis points in the next 12 months, based on the Overnight Interest Swap curve.

(BusinessDesk)

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