The Reserve Bank of New Zealand has played down its ability to curb soaring house prices across the Tasman, insisting it only has a small role to play in keeping the residential property market steady.
House prices have been soaring in New Zealand, even drawing the attention of the country’s human right’s commission which said the crisis was having a punishing impact on marginalised communities.
Although interest rates have historically been utilised as the key tool in curbing house price growth and speculative activity, RBNZ governor Adrian Orr played down their effectiveness in a speech to the Property Council of New Zealand Retail Conference on Tuesday.
“The role of the Reserve Bank is a bit part,” he said.
“We are one cause of demand changes as we alter interest rates to meet our monetary policy remit. We also work to limit mortgage lending when it appears excessively risky. However, this is more about limiting the damage to banks’ balance sheets, rather than altering overall demand.”
While the RBNZ last month hiked the official cash rate for the first time since 2014, it is not yet clear whether this had a corrective impact on the housing market, as prices already fell from record levels in the previous month.
In September, the median house price in New Zealand fell to $NZ795,000 (approximately $758,000) according to the Real Estate Institute of NZ (REINZ), from August’s record high of $NZ850,000. Despite the slight easing, prices in the year to September were still up more than 30 per cent.
The REINZ acknowledged lockdowns in the country would have had an effect on dampening prices, but said the pace of growth had already been slowing.
Mr Orr said global interest rates had more of an influence on New Zealand’s house prices than any of the RBNZ’s measures.
“Our recent research efforts suggest that it is the secular decline in global interest rates that most explains house price moves globally, with official cash rate surprises playing only a bit part,” he said.
“Our tools are limited. For example, our loan-to-value ratio restriction (LVR) tool can only impose bank lending constraints on new loans – as they are being made. It does not impact on the vast bulk of loans already made.
“This means it takes time to influence the risk of the whole bank lending book. LVR restrictions are about minimising the scale of the damage, not preventing it in the first place.”
The RBNZ announced in September it would restrict the amount banks could lend buyers with smaller deposits. The changes kicked in on Monday and mean only 10 per cent of new loans to owner-occupiers can be above an LVR of 80 per cent, down from 20 per cent previously.
But Mr Orr said this alone would not be enough to address a runaway housing market.
“Solutions to any identified problem of high house prices, housing affordability, and housing require the involvement of many government agencies, businesses, financial institutions, and broader community groups.
“There is no one agency or silver bullet,” he said.
“House prices and housing affordability are affected by both supply and demand factors, ranging across immigration, tax policy, government benefits or transfers, land availability, building standards, infrastructure, and training programmes. It is access to land and space that remains the biggest challenge to ensuring a smooth functioning housing market.”
Although the RBNZ may not be directly targeting house prices, Mr Orr acknowledged the central bank did consider the property market when it came to policy decisions.
Faced with a recovery in inflation and a tight labour market, the RBNZ is expected to aggressively ramp up the official cash rate in the coming quarters. After hiking, it became apparent that New Zealand experienced a decade-high spike in consumer prices during the September quarter.
Rate markets are expecting the RBNZ could hike the cash rate to 1 per cent by the end of the year and 2.5 per cent by the end of 2022.