"While some of this growth was at the expense of first-home buyers in early 2014, the more recent increase from late 2014 has been at the expense of 'movers'," Reserve Bank deputy governor Grant Spencer said today.
"The resurgence in Auckland house prices over the past year has made the Reserve Bank increasingly concerned about the risks to financial stability. It is certainly on our 'what keeps us awake at night' list," Mr Spencer said.
"Auckland prices have risen a further 24 percent over the past year, stretching the price-to-income ratio for the region to...double the ratio for the rest of New Zealand, and places Auckland among the world's most expensive cities.
"International evidence shows that the further house price-to-income ratios deviate from historical norms, the greater the potential for a sharp and damaging correction."
LVR curbs on investors
Mr Spencer gave a detailed update on the bank's view of the property market in a speech today to the Northern Club, in Auckland.
His comments came after the Reserve Bank in May announced plans to introduce new loan-to-value (LVR) limits on lending to property investors in the Auckland Council area.
The rules would require investors to have at least a 30 per cent deposit.
The bank reported back on Friday on its consultation on the changes.
In its report, the bank said its proposed 2 per cent speed limit for lending to Auckland residential property investors had been described as too restrictive.
It agreed to raise the limit to 5 per cent. This meant banks would be able to give a greater proportion of their lending to investors who had a house deposit which was lower than 30 per cent.
Banks complained that the implementation of the changes would be complicated and that they needed more time to prepare. In response, the Reserve Bank said the deadline for the new LVRs would be a month later, in November.
Today, Mr Spencer said data showed that the investors that had been expanding their presence in Auckland over the past year were mostly small investors, with two to four properties.
"This sort of profile - i.e smaller investors who are reliant on credit - suggests that the new LVR restrictions on Auckland residential investors are likely to have an impact on overall demand," Mr Spencer told the Northern Club.
Despite that anticipated effect, Mr Spencer said an increased rate of construction was needed.
Temporary limits
As post-earthquake construction lessened in Canterbury, it would free up tradesmen and lead to an increase in Auckland building over the next couple years.
"Our current forecasts, which are consistent with the Accord being met, suggest an annual construction rate of 8700 in 2015, increasing to 11,000 by 2017."
More intensification was needed, and key supply-side restraints remained a limited supply of ready land, restrictive planning processes and a lack of co-ordinated infrastructure development.
"Special Housing Area building activity has remained very slow to date, with around 800 dwellings consented," Mr Spencer said.
The Reserve Bank fully supported measures in the Budget to reduce "the tax-advantaged status of investor housing", Mr Spencer said.
"The establishment of a two-year bright-line test for assessing trading gains from investment properties will bolster the effectiveness of the existing tax in this area."
In October 2013, the Reserve Bank introduced temporary limits on new residential mortgage lending. Banks faced restrictions in their lending to home-buyers with a deposit of less than 20 per cent.
Mr Spencer said that had seen the proportion of high LVR mortgage loans on bank balance sheets fall from 21 per cent to 14 per cent.
The bank had stated its intention to begin removing LVR restrictions when they were no longer warranted, but signs of housing demand spilling from Auckland to Hamilton and Tauranga meant that could be delayed.
Mr Spencer said the bank recognised that low interest rates were contributing to housing demand pressures, but current weakness in export prices, economic activity and CPI inflation meant "interest rate increases are likely to be off the table for some time".
"Our expectation is that investor LVRs will reduce financial system risk arising from this sector and assist in moderating the Auckland housing market cycle. "However, macro-prudential policy is one of many factors aimed at reducing the imbalances in the Auckland housing market. Much more rapid progress in producing new housing is needed in order to get on top of this issue."
Labour's housing spokesman Phil Twyford said that, in Reserve Bank-speak, Mr Spencer's comments on the lack of building in Special Housing Areas were "scathing".
"The poor old Reserve Bank once again has to carry the can for National's failure to get a grip on the Auckland housing crisis. The new LVRs...are the only significant housing policy we've seen in years, in stark contrast to the grudging half measures the Government keeps serving up.
"The Reserve Bank is clearly worried about the growing influence of speculators in the Auckland market and links it to further predicted declines in home ownership. Maybe Nick Smith should stand down as Housing Minister and ask the Reserve Bank to take his job."
Read the full speech here:
