Brian Fallow

The Economics Editor of the NZ Herald

Wheeler warns on housing

Reserve Bank head says closing supply gap in Auckland could take five years

Graeme Wheeler says mortgage rates at 50-year lows are encouraging renters to enter the property market. Photo / Mark Mitchell
Graeme Wheeler says mortgage rates at 50-year lows are encouraging renters to enter the property market. Photo / Mark Mitchell

It could take three to five years to close the gap between housing supply and demand in Auckland, if left to supply measures alone, says Reserve Bank governor Graeme Wheeler.

In a speech to the Institute of Directors in Auckland yesterday Wheeler reiterated the bank's concern that "the current escalation of house prices is increasing the probability, and potential effect, of a significant downward house price adjustment that could result from a future economic or financial shock".

He acknowledged the Auckland housing accord, which aims to add 39,000 houses and sections to the supply side of the market over the next three years.

But he also pointed to the contraction in the capacity of the construction sector since the recession - 5000 fewer firms and 14,000 fewer employees in February last year than four years earlier - and the competition for resources represented by the need to rebuild Christchurch.

On the demand side, mortgage rates at 50-year lows and now only slightly above average rental yield of 4.5 per cent, combined with the rise in house prices, increased the incentives for renters to buy their first home and home owners to upgrade.

Changing the tax treatment of housing to reduce its attractiveness as an investment relative to other assets could moderate demand for properties, the governor said.

As for the Reserve Bank's ability to influence demand, Wheeler reiterated his reluctance to raise the official cash rate when inflation is low and the exchange rate is high.

"This is where macro-prudential policies can play a useful role," he said. They include quantitative restrictions on low-deposit lending.

Such measures had been deployed in Canada, Israel, Korea, Norway and Sweden, he said, and the evidence to date suggested that limiting such loans during periods of quickly rising property prices could reduce credit booms and the probability of financial distress and sub-par growth later.

"But they are no panacea," he said.

"This reinforces the importance of progressing measures to enhance productivity in the construction sector, free up land supply and examine related tax issues."

Statistics New Zealand yesterday reported building consents for dwellings last month were up 20 per cent on April last year in Auckland and up 40 per cent in Canterbury.

But for the year ended April nationwide dwelling consents are still more than 25 per cent below the average issued during the boom years of 2003 to 2007 inclusive.

- NZ Herald

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