House prices are rising in New Zealand

New Zealand is resuming lending amid fears of housing bubbles

New Zealand’s central bank will reintroduce mortgage lending restrictions from March amid concerns that historically low interest rates will create a housing bubble in the country.

This is followed by an intervention by the newly elected Labor government, which wrote to the governor of the Reserve Bank of New Zealand, asking the bank to take into account the “instability” of property prices when setting monetary policy.

Residential property prices have soared nearly 20 percent in the past 12 months, bringing the average price of a house in Auckland, New Zealand’s most populous city, above NZ $ 1 million (USD 700,000) for the first time, industry data shows.

High-risk loans increase the financial vulnerability of households, businesses and banks

Adrian Orr, governor of the RBNZ, said Wednesday the bank would put easing restrictions on lenders in May, which it eased in May. Since then, lending to real estate investors at higher risk has increased.

He added that the RBNZ would like to add debt-income restrictions to its macroprudential toolkit, which will require government approval.

“High-risk loans increase the financial vulnerability of households, businesses and banks. For example, high leverage in the housing sector poses a risk if house prices fall or unemployment rises. . . We do this to ensure that banks remain stable in the face of future housing downturns, ”Orr said.

Some lenders are already tightening lending. ANZ New Zealand plans to lower the maximum loan-to-value ratio for retail investors from 80 to 70 percent from December 8th.

New Zealand policymakers are increasingly concerned that rising house prices could lead to a correction and financial instability during the worst recession since World War II. House price inflation has accelerated this year in the OECD Club of Rich Countries to an annual rate of nearly 4 percent and is even higher in the US and some EU countries.

The rise in house prices poses a political problem for the Jacinda Ardern government, which pledged to address affordability during its first term in office. However, housing supply remains severely constrained, driving prices soaring, while government plans to build 100,000 houses within a decade were turned down last year after completing just a few hundred houses.

Wellington’s decision to write to Mr Orr to request a change in the RBNZ’s monetary policy remit to include stability in house prices has sparked a debate over the bank’s independence and the aggressive measures it’s taking to stimulate the economy during Covid- 19 has taken.

Last month, the RBNZ urged lenders to ensure that they are technically and legally ready to deal with negative interest rates by the end of 2020 – a move the market interpreted as a sign that the key rate has cut from its record low of 0.25 percent would be.

Mr Orr said he had no concerns about the bank’s independence and that it would work with the government on housing and affordability. He also defended the RBNZ’s response to Covid-19, saying it would limit the economic shock to businesses and households. He said the bank had already considered housing costs and financial risks when setting monetary policy.

Cameron Bagrie, founder of research firm Bagrie Economics, said that given concerns about house prices, adding an explicit reference to house prices to the monetary policy remit, which is currently focused on full employment and inflation, would be a good move.

“The RBNZ has stated that the debt-income limits would be a useful addition to the macroprudential take-kit. Give them the tools, ”he said.