Housing market needs supply boost and demand restraint
Current imbalances in the New Zealand housing market present risks for both financial stability and price stability, Reserve Bank Deputy Governor Grant Spencer said today.
To reduce those risks will require more responsive supply, as well as restraint on demand, Mr Spencer said in a speech to the Property Council in Auckland.
"The underlying issue in the New Zealand housing market is a shortage of supply. In Christchurch this is a direct result of the earthquakes. In Auckland, the shortage has been growing over a much longer period, with weak rates of house building since 2005."
"But house price inflation has accelerated only over the past two years, coinciding with low interest rates, easier bank credit and a growing trend amongst renters to become first-home buyers. The recent turnaround in inward migration is also adding to the excess of demand over supply."
Mr Spencer said that moves to increase the housing supply are well underway and residential building consents are trending upwards.
"A more responsive supply side is key and will require: a responsive and innovative building sector; an adequate supply of labour, some of which will need to be imported; and a responsive planning and consenting process. The accord between Government and the Auckland Council is a positive step in this direction.
"However, the combined three-year targets of Christchurch and Auckland are very ambitious and it will require a major effort to get near them.
"Given the relatively slow response of housing supply, it does not make sense to let credit-based housing demand get too far out in front."
Mr Spencer said that the loan-to-value (LVR) restrictions on bank mortgage lending, introduced on 1 October, are aimed at moderating house price inflation by reducing the effective demand for housing. While they should help to reduce house price inflation, New Zealand house prices are likely to remain high on most metrics. In this sense it is hard to see how LVR restrictions will materially reduce the existing incentives to develop new residential property.
"The impact of LVR restrictions will not be uniform across the country. Market segments with a higher proportion of high-LVR borrowers are likely to see larger effects, as will areas where house prices and borrower incomes exceed the criteria for Welcome Home Loans, which are exempt."
"The LVR restrictions are intended to reduce the build-up of systematic risk in the New Zealand financial system. They will also potentially reduce the extent of interest rate increases, and hence exchange rate pressure, that may be needed in the coming cycle. The LVR restrictions are also expected to reduce risk in the banks' balance sheets."
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