by Miriam Bell
In the Reserve Bank’s Financial Stability Report (FSR) this morning, the bank highlighted the country’s housing market as an ongoing concern.
Despite this, the Reserve Bank has opted not to introduce further lending restrictions for the time being.
While speculation that such measures were on the cards today has been rife of late, commentators were not surprised by the Reserve Bank’s decision to hold fire.
However, many economists believe the Reserve Bank will be sending more macro-prudential policy the housing market’s way.
Westpac chief economist Dominick Stephens said the Reserve Bank’s announcement this morning was pretty much along the lines of what they expected.
Introduction of macro-prudential measures would had to have been based on just two months of, admittedly strong, house sales data, he said.
“Instead, the RBNZ has taken a cool-headed approach to recent developments, while noting that it will be monitoring the situation closely with a view to further lending restrictions if needed.”
There was less discussion of possible options for dampening housing demand in the FSR than he expected, Stephens said.
“This indicates the Reserve Bank is not currently close to putting anything in place.
“Having said that, we do expect that a new round of further macro-prudential tightening in some form by year-end.”
The Reserve Bank was fervent on the idea that last year's Auckland-specific LVR restriction, along with the government’s tax measures, led to a slowdown in the Auckland housing market, he said.
“It also noted that, from a financial stability point of view, the LVR restrictions to date have been quite successful in reducing the risks to the banking system – and that is their job, as opposed to reducing house prices.”
In light of the apparent recovery of the Auckland housing market in recent times, many thought the Reserve Bank would deliver a tougher message on the issue.
ANZ chief economist Cameron Bagrie said the FSR was a softer signal, from the Reserve Bank, than both he and the market thought it would deliver.
“The Reserve Bank seems relatively confident that its LVR restrictions have had some impact and ‘reduced the share of risky lending on bank balance sheets’.
“It acknowledges that house price strength has begun to broaden to other regions, but it notes that ‘house price-to-income ratios are generally much lower than in Auckland’, signalling that it is less worried about this regional strength from a financial stability point of view.”
However, the Reserve Bank did note that “a resurgence of house price inflation in Auckland would be of real concern” and it is monitoring developments accordingly, he said.
“It seems inevitable that the Reserve Bank will need to do more on the macro-prudential policy front with regard to housing.”
Conflict between its inflation and financial stability mandates remain, while a wedge needs to be driven between retail and wholesale interest rates, Bagrie said.
“The Reserve Bank looks to have kicked the issue to touch for the time being, but we suspect it will return later in the year.”
Housing prices are not just an issue for the Reserve Bank to try and solve – and the FSR announcement emphasises that message, NZIER senior economist Christiana Leung said.
“While they have made the choice to not announce any further macro-prudential measures at this point, they have kept the door open to them.”
She said that if we continue to see ongoing pressure on the housing market, the Reserve Bank will want and need to be seen to be doing something.
“It will be interesting to see what this means when it comes to the June OCR announcement.”
In the FSR, the Reserve Bank also pointed to increased supply as the solution to high house prices.
Coming as it does in the wake of yesterday’s release of foreign buyer data, which has led to Housing Minister Nick Smith dismissing the idea of a land tax for overseas buyers, the focus has shifted back to supply measures.
Yesterday Finance Minister Bill English told media the government's role was to enact supply side reforms to increase housing supply, particularly in Auckland.
Today he hinted to media that the upcoming Budget will include supply side announcements.
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