New Zealand's property market has cooled a little as restrictions on the level of low-equity home loans and rising mortgage rates have tempered demand in recent months, the Reserve Bank says.
Annual house price inflation slowed to 8.8 per cent in January from a pace of 9.7 per cent in October, with the moderation influenced by the Reserve Bank's limits on the level of high loan-to-value ratio mortgages, the bank said.
The prospect of a higher official cash rate has fed into increased mortgage rates over the past six months, and that added to the moderation. The national property market has been underpinned by a shortage of supply in Auckland and Christchurch, the country's two biggest cities, and increasing inbound migration.
"Restrictions on high loan-to-value ratio mortgage lending are starting to ease pressure, and rising interest rates will have a further moderating influence," governor Graeme Wheeler said in a statement. "However, the increase in net immigration flows will remain an offsetting influence."
Wheeler imposed the speed limits on home lending on deposits of less than 20 per cent from October last year as he balanced the tension of a bubbling property market and the threat it posed the nation's financial stability in the event of a sharp correction against making an already elevated currency more attractive to foreign investors if he hiked interest rates.
In today's monetary policy statement, the bank says much of the housing market's moderation appears to be related to the lending limits, and the early data is consistent with its expectation the restrictions will lower annual house price inflation by between 1 and 4 percentage points, and trim household credit growth by between 1 and 3 percentage points.
"However, the recent weakness in housing market data suggests that the impact of the LVR policy may be more front-loaded," the MPS said.
The bank said it's too early to determine how persistent the slowdown will be, and the level of high LVR lending may rise now commercial banks have worked through their pipeline of pre-approvals and adjusted to the new regime.
At the end of January, about 40 per cent of mortgages were on floating rates, down from 53 per cent a year earlier, and about 73 per cent were on floating or a fixed rate of less than one year.
"Over the past six months there has been an uptick in borrowers fixing for more than two years, but this still makes up a small proportion of the total," the bank said.
The Reserve Bank doesn't expect a repeat of the debt-fuelled consumption of the mid-2000s, with high debt levels and rising interest rates prompting a more prudent response from households, and is more upbeat in its forecast household saving rate. The bank sees positive savings of 0.5 per cent in the 2014 March year, slowing the 0.2 per cent in 2015, before turning negative in the following years.
"After an extended period of low interest rates and with household debt still high, there is perhaps more uncertainty than normal about how households will response to rising interest rates," the MPS said. "The bank will monitor how spending and demand in the household sector develop over coming quarters."