Reserve Bank Governor Graeme Wheeler has more than New Zealanders to contend with as he tries to head off a potentially calamitous housing bubble.
His introduction of a broad-based limit on high loan-to-value mortgage lending takes New Zealand down a new, and in this country untried, route that he hopes will limit stress when current low mortgage rates start climbing. However, international events could blunt his efforts.
The governor resisted political pressures to exempt first-home buyers from the restrictions, introduced on October 1. Since then banks have been restricted to issuing fewer than 20 per cent of their loan book to customers with less than a 20 per cent deposit.
Wheeler lived in the United States during the global financial crisis and witnessed the trauma wrought by house prices falling faster and further than the equity purchasers put into their homes. Negative equity, where a property's value is significantly less than the mortgage, caused huge social and economic damage in the United States and parts of Europe.
He wants to avoid those traumas, and seems to be doing so at the cost of some first-home owners having to delay house purchases until they save enough to qualify for a mortgage.
The continued strength in the Auckland housing market is also an area of concern.
Wheeler has made it clear the Reserve Bank will move, probably as early as April, to increase the official cash rate.
A sufficient overhang of bank pre-approvals maintained the number of house purchasers during October and November, but the real test will be the number of lower priced property sales during the next three or four months.
A key driver of the Auckland housing market is a shortage of properties and, despite strenuous efforts of the Government and Auckland Council to increase supply of affordable new homes, the shortage cannot be corrected quickly. Also, strong immigration figures are increasing demand for property.
BNZ chief economist Tony Alexander describes the turnaround in immigration as rapid, though not extreme. During the year to the end of August 2012, New Zealand's population declined by 3280. During the 12 months to September this year, there was a gain of 15,174.
The annual increase this year, if monthly trends continue, could be as high as 30,000, and this will have a disproportionate impact on the already strong Auckland market. In addition, the Chinese Government is expected to further liberalise capital flows, giving Chinese residents more freedom to spend their capital abroad.
While New Zealand may not be the first choice market (North America and Australia will feel the impact of the changes more dramatically), economists believe there will be increased demand for good quality property investment here.
Dr Rodney Dickens, economist and managing director of Strategic Risk Analysis, says that China should remain the primary driver of growth for commodity exports and tourism. "And with China about to further liberalise capital flows it probably means Chinese buyers will play a larger part in other New Zealand markets in the future, including the property market."
Alexander also believes the Chinese Communist Party's moves to liberalise capital flows will affect our housing market.
Wheeler and his colleagues say their loan-to-value ratio restrictions will buy more time before they need to start increasing interest rates. But international capital flows could see them pushing rates up sooner than they want to.