Sustained momentum in house prices seems unlikely, the Reserve Bank says.
Governor Alan Bollard was asked for his view of the housing market when appearing before Parliament's finance and expenditure select committee over the release of the bank's six-monthly financial stability report yesterday.
The report says that the property market has been most robust in Auckland, where underbuilding, relative to population growth, has been most pronounced. It notes a correlation between the increase in the number of people per household and the increase in house prices, relative to the rather subdued national trend.
"We will see more [housing] starts in Auckland, and we will see those funded with a lower level of debt," Bollard said.
"We are not expecting to see very much pressure on pricing from that, principally because we think houses are pretty fully priced, and possibly over-priced, already and New Zealanders sort of understand that."
The bank does not expect any return to the conditions of the 2000s, with rapid house price inflation and a lot of interest in investor housing.
"We are not seeing that so much. We are seeing people interested in housing for that old-fashioned reason of living in them," Bollard said.
They are going into housing on a more cautious basis, with more equity, he said.
The financial stability report says that a significant resurgence of house prices would be of concern, given that they still appear high on a number of metrics, such as relative to incomes and rents.
"While house prices may continue to rise over the short term, they seem unlikely to develop the sort of momentum seen over the 2002 to 2007 period," it says.
"Even if confidence becomes strong, many homeowners already have significant debt loads that make it more difficult to trade up, and banks may not be willing to expand lending to the sector at fast rates in the current funding environment."
While the official cash rate is at an all-time low, banks have to pay a premium over that to attract both retail deposits and wholesale funding from international financial markets.
The latter includes the cost of laying off the currency risk - the risk that when the banks have to repay their foreign loans the exchange rate will have moved against them.
Liquidity in that market has declined since the global financial crisis, the report says, and the cost of hedging against the US dollar is near the highest it has been since 2000. Against the euro it is even higher.
Meanwhile the bank is pressing on with moves to strengthen banks' financial resilience.
Higher minimum capital requirements, already exceeded by the banks in practice, are expected to come into force at the start of 2014, as would the capacity for the Reserve Bank to require an additional counter-cyclical capital buffer to counter excessive credit growth.
ANZ chief economist Cameron Bagrie said that requiring the banks to hold more equity capital would mean that, unless they increased their margins, return on equity would decline.
The margin change required to maintain existing returns on equity could be equivalent to one or perhaps two increases of 25 basis points in the OCR, he said.