How house prices affect inflation
House prices affect how much money people spend. Housing equity (the difference between what you owe on your mortgage and what the house is worth) represents 55% of household net wealth.
When house prices go up, homeowners feel better off financially. They tend to spend more money.
When house prices go down, there's a risk for homeowners that their house will be worth less than their mortgage. They're likely to cut down on spending and hold off from making personal investments because they feel less wealthy.
When house prices go up, the costs of construction and rent also tend to increase. This impacts the Consumers Price Index (CPI), which is what we use to measure inflation.
As a result, rising or falling house prices have an impact on inflation.
How house prices affect financial stability
House price sustainability is important for our financial stability objective of protecting and promoting the stability of New Zealand's financial system. When house prices move well above their sustainable levels, they can pose a threat to financial stability.
A rise in house prices often comes with increased mortgage lending. In New Zealand, mortgage lending represents 62% of total bank loans. If households take out large loans compared to their income or the value of their house, this can put the banking system at risk if there is a sudden shock to the economy.
If house prices rise too far and too fast, this can lead to a sudden correction in prices. This would harm the financial system, and slow down the economy.
Our role in house prices
Our role in house prices covers 2 areas:
- We set the Official Cash Rate (OCR) which impacts the mortgage rates that banks charge. The lower interest rates are, the lower the cost of borrowing to pay for a house is.
- We regulate banks by asking them to restrict the proportion of risky mortgages they take on to keep the economy safe from risks to the financial system.
How we regulate banks
Under the Financial Policy Remit, we must consider the government’s objective of supporting more sustainable house prices when setting financial stability policy, including bank lending rules. We do this by using financial stability tools such as loan-to-value ratio (LVR) restrictions.
Changes to our Remit
In 2023, as part of the Remit Review process, we moved reference to house price sustainability from the Remit objectives and into the Monetary Policy Committee (MPC) Charter.
The Charter now requires the MPC to explain their assessment of the effects of their monetary policy on the Government’s objective of supporting more sustainable house prices.