Reserve Bank deputy governor Grant Spencer says it's still too early to declare victory with the recent slowdown in house prices and the central bank will be monitoring demand pressures from migration and the ability of the construction sector to convert intentions into actual builds.

The central bank acknowledged the moderation in house prices when keeping the official cash rate at 1.75 per cent today, saying loan-to-value ratio limits on highly-leveraged lending and increasing mortgage rates had helped cool the market which has posed a threat to the stability of the wider financial system in recent years. New Zealand is experiencing a building boom, driven largely by the housing shortage in the country's largest city of Auckland which is failing to keep up with rapid population growth.

A key uncertainty for the bank is whether net migration starts to taper off, with the RBNZ's forecasters struggling as much as the rest of the market to accurately predict when the number of new arrivals will fall. The country's strong economy with 3.5 per cent average annual growth tipped over the coming four years remains an attraction, especially when Australia's fortunes remain subdued.

"Clearly, house prices have moderated," Spencer told BusinessDesk in an interview. "It's good news but as you know the LVRs on previous occasions have had an effect for six-to-nine months and then the markets come back because of the ongoing migration and supply having trouble keeping up, so that's again a potential risk this year and so we're being a bit cautious and not declaring victory."


While the inflationary aspect of rising house prices and the spillover into domestic demand might be showing signs of moderating, Spencer said the central bank was still wary of household consumption, which unexpectedly accelerated through the second half of last year.

"We do have consumption coming back a bit, but there's probably risks on either side of that," he said.

The Reserve Bank anticipates house prices will stay elevated through 2017, albeit at a lower level than what it was predicting in its November forecasts, and slow next year to reflect "an easing in net immigration, greater housing supply and affordability constraints becoming more binding," today's monetary policy statement said. The central bank projects residential property investment to grow 15 per cent in the March 2017 year from just 2.8 per cent in 2016, before slowing to 8.2 per cent in 2018 and 3 per cent the following year.

Governor Graeme Wheeler told Parliament's finance and expenditure committee the supply side was still the issue that needs addressing with the nation's housing problem.
"The answer is the houses have to be built and put in place," Wheeler said. "We need completed houses on the ground."

Government data today showed residential building consents fell for a second month in December, although Wheeler said he hadn't seen the figures when asked about them at the select committee.