Keeping the pressure on

The latest Financial Stability Report reveals that the Reserve Bank is far from relaxed about the risks emanating from the housing market, despite its success to date in slowing the rate of house price inflation. As subsequent data has shown, the risk of a resurgence in the housing market remains high, even without adding fuel to the fire by making it easier for people to borrow.

The RBNZ had been signalling for some time that the November Financial Stability Report would assess whether the cap on high loan-to-value ratio (LVR) mortgage lending, which was imposed last October, could now be loosened or removed. The high-LVR limit was always portrayed as a temporary measure, used to manage the risks to the financial system over the course of the cycle, and the RBNZ had set out three criteria for its removal: whether it had had the desired effects, whether removing it would risk a resurgence in the housing market, and whether it was creating distortions that outweighed its benefits.

The first criterion seems to have been met to date. The cap on high-LVR lending, along with the 100 basis points of OCR increases this year, meant that by September annual house price growth had slowed to around 5%, compared to 9.4% in the previous year. Similarly, housing credit growth had slowed to 4.7% in the year to September. These are more in line with household income growth, which suggests that the risks to the financial system posed by the housing market are at least no longer growing.

However, while the housing market may have been cowed in recent times, the RBNZ is far from convinced that it has been tamed altogether. Surging net inward migration – which we expect to reach a record 55,000 people by the middle of next year – will inevitably put some pressure on the housing market. In earlier times, the RBNZ had said that its aim was to slow housing demand until supply had a chance to catch up. Our research suggests that if anything they have moved further apart in the last year: while there has been a strong pickup in building activity, it has been comprehensively overtaken by population growth.