The Reserve Bank will disappoint the financial markets and leave the official cash rate on hold for another two years, for fear of fuelling the fire raging in Auckland's housing market, the New Zealand Institute of Economic Research says.
The central bank was walking a tightrope, NZIER economist Christina Leung said, releasing the institute's quarterly economic forecasts yesterday. If its only concern was consumer price inflation it would cut rates, but that would ignore the risk posed by asset price inflation in the Auckland housing market.
"[Auckland] house prices are now at such unaffordable levels that there is an increasing risk of a bubble and the potential for wide-ranging economic damage if there is a bust," she said.
"New policies from the Reserve Bank and Government to be implemented from October 2015 will tackle lending to investors, taxes paid by investors, identifying foreign investors, and opening up large tracts of government-owned land."
They would have only a marginal impact on house price inflation, however.
Leung does not accept the argument that the Reserve Bank keeps its twin roles in entirely separate compartments: monetary policy where 2 per cent CPI inflation is the target and the official cash rate the instrument in one pigeonhole and its prudential responsibilities as the guardian of financial stability, where it uses regulatory tools like loan-to-value ratio restrictions, in another.
She noted that in its Financial Stability Report this month the bank highlighted the risk posed by extraordinarily low global interest rates inflating asset markets which could "unwind in a disorderly fashion", it said, when interest rates began to return to more normal levels. "To cut [the OCR] would introduce that risk to the Auckland housing market."
She acknowledges the risk that if the bank does not cut the OCR when the markets are seriously short the New Zealand dollar exchange rate could climb, But longer term the prospect of the US Federal Reserve raising interest rates would weigh on the exchange rate. The institute's forecasts have the Kiwi dollar below US70c in the March quarter next year.
The Auckland market is the greater concern, Leung argues, when the median house price is 8.5 times income (compared with 5.5 times nationwide) and 30 times rent even when rents are rising at around 6 per cent a year.
"The policy moves from the Reserve Bank and Government are a significant shift. The explicit focus on investors, regionalisation of policy and a willingness to change position on foreign buying are all policies that were considered outside of 'scope' only months ago," the institute says. "These policies will moderate housing demand at the margin, but the real fix is difficult: efficient and responsive housing supply."
While issuing of dwelling consents in Auckland had climbed over the past two years, it remained below the levels prevailing between mid-1990s and the mid-2000s and far below what is needed.
"In Auckland, just over 7900 dwellings were consented over the past year, undershooting demographic demand of around 10,000 to 13,000 homes."