Prime Minister, Jacinda Ardern, on latest public housing developments. Video / George Heard
Housing investment is no longer the "one-sided bet that people talk about" according to Reserve Bank Governor Adrian Orr.
But despite forecasting price falls, the Bank doesn't see house prices becoming significantly more affordable any time soon.
In an occasionally terse select committee meeting on Thursday morning, Orr clashed with MPs over New Zealand's housing crisis and its role in fuelling the massive asset price inflation seen last year.
The Bank has found itself at the centre of a political firestorm over the role its low interest rates and digital money printing played in pumping up asset prices.
An unlikely pairing of Green MP Chlöe Swarbrick and National MP Nicola Willis have been pushing the Bank to be more transparent with how it forecasts and influences house prices.
Orr told the committee that the bank did not "target" house prices.
"The Reserve Bank does not target house prices, I truly wish people could understand that," Orr said.
This is despite Finance Minister Grant Robertson and the Bank agreeing earlier this year that the Bank's governing remit will require it to "take into account the Government's objective to support more sustainable house prices".
The question then became how could the bank still fulfil that remit if it did not target house prices.
Swarbrick asked whether Robertson's remit change actually made any difference to the way the Bank actually does its job.
Orr said the remit change did make a difference - but only to a point.
"Yes it has made a difference. The fact I am sitting here now talking to you about these issues is very important; the fact that we are currently looking at consulting again on further LVR [loan-to-value ratio] restrictions and debt serviceability restrictions is a very clear indicator that we are more involved around concerns for household balance sheets than total financial system stability," Orr said.
Orr's explanation essentially means that before the remit change, the Bank saw its job as looking after the stability of the financial system as a whole. After the remit change, the Bank became more concerned with the financial capability of individual households which may be placed under pressure by the housing crisis.
There was a two-sided warning in Orr's remarks; slowly falling house prices would improve affordability for some households, but new entrants to the market would come under pressure as the value of their homes fell.
Orr was steadfast in his refusal to weigh into the debate over what constitutes an "affordable" house price because affordability had a different meaning to everyone, depending on their income level and their role in the market.
An affordable house for a first-home buyer is different to an affordable house for an investor.
The Bank prefers to talk about sustainable house prices, which are still difficult to define, although the Bank concedes prices are currently above sustainable levels.
Orr said the Bank's main policy tool, the ability to raise or lower interest rates, was not as effective at solving the housing crisis as people may think.
"There is such a limited extent of monetary policy. I can raise interest rates - that may bring house prices down. That means that people might be able to afford them.
"At the same time, higher interest rates mean they are less affordable because you have to pay higher interest rates - there is no magical side to monetary policy," Orr said.
The Bank's monetary policy statement, released on Wednesday, forecast house prices would eventually begin falling towards the end of next year. Data released by the Bank shows this assumption is based on house building increasing above the historic average, while population growth falls.
Orr warned that as interest rates head northwards, households with massive mortgages could come under pressure.
"Debt servicing costs as a percentage of household income, debt levels as a ratio of household income are at extreme highs.
"If mortgage interest rates return to a more neutral level then there will be pressure on many recent home buyers because they have taken on a lot of debt," Orr said.
He warned that investors could also take a hosing.
"You don't need to alter your assumptions at all-around rental growth or income growth to say that investment housing will also come under pressure. It won't be the great one-sided bet that people talk about when they are buying into houses.
"There are risks and returns and those risks are turning the other way for people," Orr said.
Orr said it was obvious that house prices were very unsustainable and it would take eight years of frozen house price growth for house prices to get back down to normal debt-to-income levels.
"You have to make a very bold assumption to sit here and have no house price growth and uninterrupted income growth to bring that ratio down to something that looks sensible," Orr said.
Orr said that the solution to the housing crisis was building more houses, and pushed back on the idea that the bank could solve the housing crisis on its own.
He said the Bank's lending restrictions were pulling investors out of the market but warned that the restrictions would make it more difficult for first home buyers too.
