Housing pressures are easing gradually
"The volume of house sales has dropped considerably across the country, other than in Canterbury, and the slowdown in volume has also been reflected in prices. Without the Loan to Value Ratio restrictions (LVRs), introduced in October 2013, annual house price inflation might be running some 2.5 percent higher," Mr Spencer said.
Housing supply conditions have also started to improve, with a recovery evident in residential construction. In Auckland, progress is being made in freeing up the supply of buildable land and improving the consenting process. In Canterbury, the replacement of severely damaged homes is well in train after a slow start.
However, the housing shortage remains large and significant increases in building are required in Auckland and Canterbury over the next three years.
"There are many parts to the housing market equation – and many risks. Probably the major risk at present is the outlook for net immigration, in part due to reduced departures of New Zealand citizens. We are forecasting net immigration to reduce gradually as economic conditions improve in Australia," Mr Spencer said.
"We've started raising the Official Cash Rate, with the aim of forestalling general inflation pressures in the broader economy. Floating mortgage rates could be 7 to 8 percent in two years' time, closer to their average of the past 20 years."
"The extent and timing of interest rate increases will depend on a number of uncertain variables, in particular the exchange rate and housing market pressures," Mr Spencer said.
We believe that LVRs are achieving their purpose. The financial system is less vulnerable to an adverse housing shock and banks are now less exposed to potential credit losses as the interest rate cycle turns upwards.
We've stated that the LVRs are temporary, but before removing them we want to be confident that the housing market is responding to interest rate increases; and that immigration pressures are not causing a resurgence of house price pressures. It will take some time to gain this assurance. At this stage we consider the earliest date for beginning to remove LVRs is likely to be late in the year.
Read the full speech on the Reserve Bank website:
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