House price boom a worry for authorities

House price boom a worry for authorities

- New Zealand's housing market is picking up strongly, supported by low rates, rising migration and weak supply

- Loan to valuation restrictions are being considered by the RBNZ, though we expect their effect would be small

- To deal with inflation risks from a rising housing market the RBNZ may need to consider lifting rates soon

On track for double-digit house price growth

New Zealand's established housing market is booming. A combination of low policy rates and supply-side constraints in Auckland and Canterbury has supported a rapid rise in housing prices and a solid pick-up in turnover. Inward migration is also beginning to pick up more broadly in New Zealand, which should further support the market and could more than offset the impact of a recent rise in fixed mortgage rates.

Double-digit house price growth is looking likely this year for the first time in over five years. Our modelling - which follows RBNZ internal methods - suggests house prices could rise by over 10% this year and we are forecasting growth of 9% in 2014.

Overheating in the housing market is very much a concern for the RBNZ at the moment, both in terms of its implications for financial stability and for generalised inflation. Public consultation on the possible usage of 'macro-prudential tools' by the RBNZ has been on-going in recent months, with an announcement expected soon. If implemented, we expect the RBNZ would impose restrictions on loan-to-valuation ratios (LVR). While this could be a minor brake on the housing market, we don't expect a policy change like this to be a game changer, given that rising housing prices are largely being driven by fundamental factors: strong demand and weak supply. In our view, house price inflation is unlikely to moderate significantly until policy rates begin to rise.

The RBNZ has begun to note its concern about the wider inflationary consequences of the strong New Zealand housing market. This is a change in rhetoric, with previous commentary mostly focused on the financial stability risks. A stronger housing market is one reason the RBNZ may need to consider lifting rates later this year.

There has also been a notable shift toward fixed rate mortgages in recent months, which could have implications for monetary policy. More mortgages on fixed rates could reduce the effectiveness of policy rate changes, another factor encouraging an earlier RBNZ hike.

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