Auckland house prices keep RBNZ awake at night, Spencer

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“When something keeps you awake at night, it is good to do something about it,” Spencer said in a speech published on the Reserve Bank’s website Monday. The response must be multi- faceted because “the current weakness in export prices, economic activity and CPI inflation means that interest-rate increases are likely to be off the table for some time,” he said.

The median house price in Auckland, home to a third of New Zealand’s 4.5 million population, surged 21 percent in the year to July to NZ$735,000 ($485,000) amid a housing shortage and record immigration. The RBNZ has nevertheless cut the official cash rate twice in the past two months to stimulate the slowing economy and boost inflation from near zero.

It will cut the cash rate by another 25 basis points to 2.75 percent at its next policy decision on Sept. 10, according to 16 of 17 economists surveyed by Bloomberg. One forecasts no change.

“The Auckland housing market is unlikely to be a barrier to further OCR cuts,” Michael Gordon, senior economist at Westpac Banking Corp. in Auckland, said in an e-mailed note. He expects the cash rate to fall to 2 percent next year.

Housing Demand

The RBNZ recognizes that low interest rates are contributing to housing demand pressures and this is a factor it takes into consideration when setting monetary policy, Spencer said today. The resurgence in Auckland house prices has increased the bank’s concern about financial stability, he said.

“Investors are now accounting for 41 percent of Auckland house purchases, up 8 percentage points since late 2013,” Spencer said.

From Nov. 1, the RBNZ will require Auckland property investors to have a deposit of at least 30 percent to secure a mortgage. The government has also announced it will tax capital gains on property held for less than two years from Oct. 1.

While these policies may help to reduce imbalances in the Auckland market, “much more rapid progress in producing new housing is needed in order to get on top of this issue,” Spencer said.

Nasty Surprise

Prime Minister John Key said there was nothing new in Spencer’s comments and the government was already addressing the issue through increased housing supply, which would eventually see Auckland house-price inflation moderate.

“One of the things the Reserve Bank didn’t say, but actually frankly they should have said, is that interest rates won’t stay low forever,” Key said at a news conference in Wellington today. “So when people go and buy houses purely in the expectation of capital gain, they’ve just got to be careful they’re not in for a nasty surprise.”

Spencer said there have been some signs in recent months of housing demand spilling out of Auckland and starting to fuel price increases in the neighboring cities of Hamilton and Tauranga. If this persists, the removal of restrictions on low- deposit lending imposed by the RBNZ in 2013 could be delayed, he said.