House prices a concern: Reserve Bank

New Zealand’s rising house prices are a risk to the economy, the Reserve Bank’s deputy governor says.

Monday, April 8th 2013, 12:00AM

by Susan Edmunds

Avoiding another housing boom is critical for the country’s economic and financial stability, Grant Spencer told the Employers and Manufacturers Association in Auckland today.

He said the overall gearing of New Zealand households was relatively low but a growing number had high levels of debt and interest payments consumed a large portion of their income. This made them vulnerable to interest rate movements and also put pressure on banks’ balance sheets.

Spencer said easing credit criteria and rising house prices had pushed more people into the property market. A lack of construction meant excess demand was driving prices up.

“We are left with concerns that the current escalation of house prices is increasing risk in the New Zealand financial system by increasing both the probability and potential effect of a significant downward house price adjustment that could result from a future economic or financial shock.”

He said if the housing market momentum continued, a monetary response was likely.

Governor Graeme Wheeler had previously indicated low interest rates were likely for at least the next 18 months.

BNZ agreed that house price inflation was too high but said it could not see a catalyst for any price correction.

The average house price in New Zealand is 6.9 times the average pre-tax annual salary.

That is down from the peak of 7.6 times recorded in 2007 but in the United States, the current equivalent ratio is just 4.1 times.

BNZ said a collapse in house prices would put the banking sector under pressure but it was hard to see how such a collapse could occur, given the supply constraints.

Economist Craig Ebert said: “Surely one of the important lessons the world has learnt over recent times is that grossly over-valued asset prices typically prove a much bigger threat to the economy than a handful of cents on an exchange rate, or a few decimal points on a headline CPI rate; moreover, that unusually low interest rates can exert powerful upward forces on asset prices through manifold channels.”

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