Rising prices are stoking fears at Reserve Bank of boom followed by destructive bust.
Climbing house prices and a growing proportion of lending at high loan-to-value ratios are stoking fears at the Reserve Bank of a boom that this time will be followed by a destructive bust.
Deputy governor Grant Spencer warned yesterday, in a speech to the Employers and Manufacturers Association in Auckland, that the bank's flat outlook for interest rates would need to be revisited if rising house prices and the associated expansion of credit began to spill over into excessive consumer spending and inflationary pressure, as they did during the mid-2000s boom.
Mortgage rates on offer are the lowest since the 1960s and have dropped half a percentage point over the past year, even with the official cash rate on hold, as banks accessed lower funding costs on international markets.
"Added to this, credit has become easier to obtain, with banks competing aggressively to gain or protect their mortgage market shares," Spencer said.
"An increasing proportion of new mortgage lending is going out at high loan-to-value (LVR) ratios. Now around 30 per cent of new lending is at LVRs over 80 per cent, compared to around 25 per cent of lending in late 2011 and early 2012."
Annual growth in housing credit is just over 4 per cent, compared with just over 1 per cent a year ago, and has been running at higher rates over recent months.
The Reserve Bank is assuming that the increase in debt by some borrowers, especially first-home buyers, will continue to coincide with existing home owners increasing the equity in their properties, rather than withdrawing equity and spending on the strength of rising house prices as in the mid-2000s boom.
But that assumption could be wrong, Spencer said, noting that private consumption grew 1.6 per cent in the last three months of 2012 alone.
"If the house price and credit expansion begin to fuel excessive consumption spending and inflationary pressures, a monetary policy response would become more likely."
In the Reserve Bank's other role, as the guardian of stability in the financial system, it sees the current escalation of house prices as an increasing risk, "by increasing both the probability and potential effect of a significant downward house price adjustment, that could result from a future economic or financial shock".
Unlike many other countries, New Zealand did not experience a major house price bust during the global financial crisis.
The median house price is now 12 per cent above its level at the end of 2007 and, according to a recent international study of housing affordability, the third highest, relative to disposable incomes, among comparable countries, Spencer said.
In the short to medium term the Reserve Bank could mitigate the risks to bank balance sheets by requiring them to hold more capital, and curb the demand side of the housing market by pushing up interest rates.
But in the medium to long term supply-side measures were essential, especially in Auckland.
It was not just a zoning or metropolitan urban limit issue, he said. Subdivision and building costs were also serious constraints.