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Addressing housing pressures key to stability

Avoiding another costly housing boom is critical for economic and financial stability, particularly at a time when the economy faces headwinds from an overvalued exchange rate, drought and a substantial programme of fiscal consolidation, Reserve Bank Deputy Governor Grant Spencer said today.

In a speech to the Employers and Manufacturers Association in Auckland, Mr Spencer said the housing market is important to New Zealanders, from an economic, financial and emotional perspective. It is also highly relevant for the Reserve Bank's monetary and financial stability policies.

On average, the gearing of New Zealand households is relatively low, but a growing number of households have high levels of debt with interest payments consuming a large portion of their income. As well as leaving households vulnerable, this could also put pressure on banks' balance sheets.

Easy credit conditions and rising house prices have prompted more people to buy homes, and with construction still at a slow pace, this has contributed to excess demand and added house price pressures, Mr Spencer said.

"We are left with concerns that the current escalation of house prices is increasing risk in the New Zealand financial system by increasing both the probability and potential effect of a significant downward house price adjustment that could result from a future economic or financial shock."

In the short-to medium-term, we want to ensure that the banking system is adequately capitalised for the risks associated with mortgage lending, and also avoid demand pressures that can create a destabilising overshoot of house prices while additional supply is gradually brought on stream.

If the housing market momentum continues and adds inflationary pressures, a monetary response would become more likely.

Macro-prudential tools, which the Bank is currently consulting on, may help to rein in credit supply decisions by banks and moderate credit demand from households. But these tools are not as powerful as monetary policy.

Mr Spencer said housing supply pressures in Christchurch will be addressed over coming years as the major rebuild programme gathers pace. Auckland's situation is more complex, with a range of supply constraints and cost factors that need to be worked on.

Media contact:
Naomi Mitchell
External Communications Adviser
Ph 04 471 3960, 027 485 9474, [email protected]