The strength of the surge in net immigration will influence both the outlook for interest rates and how long loan-to-value ratio curbs remain in place, says Reserve Bank Deputy Governor Grant Spencer.
In a speech on the housing market in Auckland yesterday, he said float-ing mortgage rates could be 7 per cent to 8 per cent in two years, up 2 percentage points from present levels.
While that would only take mortgage rates back to their average over the past 20 years, the impact of interest rate rises would be felt more quickly than during the boom of the mid-2000s.
That's because 70 per cent of home loans by value are either float-ing or fixed for less than a year, whereas a majority were fixed for between two and four years a decade ago.
Also, the starting level of debt relative to income is higher, meaning the proportion of disposable income pre-empted by mortgage payments would be greater.
A big uncertainty in the extent and timing of interest rate rises ahead was the exchange rate, Spencer said, because of its bearing on prices of traded goods and economic activity.
"The other big area of uncertainty is around housing," he said.
"Will inward migration continue to underpin housing demand? Will the dampening impact of the LVR restrictions be long-lasting? Will the supply response soon start to have a moderating effect on house prices? Will homeowners increase their spending out of capital gains? And how will rising mortgage rates affect spending by borrowers?"
The bank believes the LVR restrictions have had a moderating effect on the housing market and are supporting monetary policy, but it has always seen them as a temporary measure with their effectiveness reducing over time.
"Before removing the LVRs, however, we will want to be confident the housing market is responding to interest rate increases and that immigration pressures are not causing a resurgence of house price pressures," Spencer said.
"It will take some time to gain this assurance. At this stage we consider the earliest date for beginning to remove LVRs is likely to be late in the year."
In its March monetary policy statement, the bank forecast the net inflow of migrants to peak at 29,400 in the middle of this year and then ease gradually as economic conditions in Australia improved.
But the net inflow in the year to March was already 31,900 and the monthly tally shows no signs of easing. ASB economists expect annual net migration to peak at 40,000 later this year.
"Cyclical turning points are hard to predict and there's a risk the net migration inflow remains greater for longer, which would underpin the demand for housing," Spencer said.
Economists point out that net immigration boosts both the demand and the supply sides of the economy, but the former effect is generally quicker.
ASB economist Christina Leung said Spencer's comments were in line with ASB's own expectations that LVR restrictions would probably be removed between late 2014 and mid-2015.
"The Reserve Bank will not remove the restrictions unless it is confident the housing market is slowing on a sustained basis and interest rates will be sufficient to continue containing house prices, as well as confirma-tion that net migration is slowing," Leung said.
"We expect nationwide house prices will rise 5 per cent in calendar 2014, with Auckland still up 9 per cent, which suggests the risks lie more with 2015, given that Auckland is the market getting the most focus from the Reserve Bank."