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RBNZ threatens cold bath for hot housing market

The final spritzer

Reserve Bank governor Adrian Orr says the central bank is watching the hot housing market in real-time and stands ready to douse it with cold water.

September house prices jumped 11.1 percent on the year and monthly sales are at a three-year high as buyers turn up in droves to bid for a limited number of dwellings.

Orr told the INFINZ virtual conference the central bank will act if it sees house prices being driven by very high leverage loans and by investors rather than households.

Early signs

“What are we seeing at the moment? Early signs of exactly both of those,” he said.  

The bank first imposed a series of loan-to-value restrictions in October 2013 to clamp down on the overheated market.

In September of that year, $1.19 billion of $4.7 billion in total new commitments had an LVR over 80 percent.

In August this year, some $757 million of $6.8 billion was in that category.

Compared to the previous peak in high LVR lending, “it is still looking okay but it is very evident that won’t stay the same under current conditions,” Orr said.

The governor said the bank is looking at the situation now and while that isn’t a signal of when it might move “we are looking at it in real-time.”

The bank has tools “and we would be prepared to use those tools,” he said.

He pointed to the loan-to-value ratios and also said the bank is “thinking again around deposit to income ratios.”

The central bank lifted restrictions on high LVR mortgages in May.

At the time, it said they would remain off for at least a year.

Interest rates

On the interest rate front, Orr said the bank has been talking about the full suite of instruments available to it and “we have been talking about which ones we might select under which conditions.”

"We want to have the most effective impact and we want it to do the least damage to the efficiency, the competitiveness of the (banking) industry.”

So far, the central bank has taken the official cash rate to an extremely low level and is preparing to implement a funding-for-lending programme, where it provides commercial banks with cheaper wholesale funding.

Negative rates

He also reiterated that “at the same time we have asked banks to get ready for the ability to have negative wholesale interest.”

“We are able to manage – if we need to go there – the trade-offs for bank profitability along with the lower retail interest rates that we need.”

He also said the central bank has plenty of room on the quantitative easing front.

While economists still expect the RBNZ to cut the official cash rate into negative territory, they increasingly say it’s possible it won’t be necessary as data and confidence improve.

ASB Bank yesterday noted the central bank continues to ponder which alternative policy tool – if any – to deploy next.

Less likely 

“The show-stopper among these – a negative OCR – is looking a little less likely than it was a month ago,” said ASB senior economist Mike Jones.

Orr said while recent economic data has been positive, it is largely a bounce-back in activity “because activity has been turned back on” after the lockdown restrictions.

While the “bounce-back feels great,” the data is going to be surrounded by incredible noise, and not for weeks or months but for quarters.

The central bank needs to focus on the medium term, said Orr.

“The limit to monetary policy is high inflation, the failure of monetary policy is deflation. I’d prefer to be battling the quality problem of re-containing high inflation than the real challenge of battling deflation.”