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Wheeler acknowledged calls to cut interest rates, given the tumbling price of crude oil, before arguing that keeping rates on hold was the most prudent option given the potential for domestic inflation to accelerate.
Auckland's average house sale price dipped slightly last month as the summer holidays and exceptionally low listing numbers depressed activity. Barfoot & Thompson data out this morning showed January's average sale price dipped from December's $758,891 to $757,319.
Volumes were low last month but Peter Thompson, Barfoot managing director, said that slight drop was expected. "Auckland property in January held on to the price gains made in December, with the average selling price in January reaching $757,319, only $1572 or 0.2 per cent down on December's all-time high average price
"A drop in prices between December and January is normal as the market gradually builds new momentum after the holiday break, but this year properties held their values," he said.
Mr Wheeler set out the bank's thinking in a speech to the Canterbury Employers' Chamber of Commerce a week after he shifted monetary policy to neutral and said the next move in rates could be up or down. He said the biggest risks to the New Zealand economy, which was "performing well", were uncertainties over China's economy and four key prices- dairy, crude oil, houses and the exchange rate.
the more that house prices get out of line with historic relativities, the greater the risk of a sharp correction, leading to financial instability
A supply side-driven drop in the price of crude oil to around US$50 a barrel would deliver a $2.3 billion reduction in the cost of New Zealand's annual petroleum imports, amounting to 1 per cent of nominal gross domestic product compared to mid-2014 levels. That amounted to a $600 annual increase in a household's disposable income, Wheeler said.
"Some commentators have suggested a cut in interest rates would be appropriate at this stage," Wheeler said. "With a sizeable positive supply side shock, such as a major fall in the price of oil, a cut in interest rates can be appropriate if there is sufficient capacity to accommodate additional demand."
A rate cut could also be warranted if domestic demand and price pressures fell further, perhaps in response to drought or some external economic event.
"However, in our current situation there are important considerations why a period of OCR stability is the most prudent," he said. Though falling commodity prices reduced headline inflation for a period they did not deliver sustained weaker inflation.
Headline inflation in New Zealand did not reflect underlying cost pressure in the non-tradables sector, and the bank's medium term forecasts and measures of core inflation "were well within the target band," he said.
He noted New Zealand was the only advanced economy with a positive output gap in the past two years, a falling jobless rate, strong migration, strong labour force participation and upbeat business and consumer sentiment. The country had also experienced an effective easing in credit conditions, with declines in fixed rate mortgages "at a time when we had financial stability concerns about accelerating house prices in Auckland."
Wheeler said the bank " would continue to monitor housing developments carefully, and the role that the banking system could be playing in contributing to pricing pressures in the housing market.
"We will be talking more about the housing market over the next few months," he said. Though the bank's loan-to-value restrictions helped constrain demand, house price inflation "appeared to be increasing again in Auckland due to rising household incomes, falling interest rates on fixed rate mortgages, strong migration inflows and continued market tightness."
Wheeler repeated that the New Zealand dollar "remained unjustified in terms of current economic conditions" and was "unsustainable in terms of New Zealand's long-term economic fundamentals."
The New Zealand dollar was recently at 73.70 US cents, from 73.35 cents immediately before the 1pm release of the speech.
Prime Minister John Key said people should take Mr Wheeler's comments about Auckland house prices on board.
Mr Key said there was a lot of "product" coming on to the market and believed the steps the Government was taking were the right ones.
"We are building a lot of houses in Auckland now, there's been a huge number of special housing areas 'zoned' and my own view on things is that people can sometimes get a bit carried away with the fervor of these things and believe it is all going to go in one direction.
"The history of things in New Zealand show you that house prices go up and down."
Labour finance spokesman Grant Robertson said the Government had failed to deal with the housing crisis, and had " effectively outsourced it to the Reserve Bank".
Mr Robertson said while he believed the Government had "ignored the pleas of first home buyers to take action on the housing crisis" it would struggle to ignore Mr Wheeler, who said today 'much more needs to be done' to get more homes built.
"The Government should not leave the housing crisis to the Reserve Bank. John Key needs to build more houses in Auckland," Mr Robertson said.
"Instead he is fiddling with the RMA while Auckland's housing market is on fire."
- additional reporting Audrey Young
