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Since June the dollar has fallen about 5 per cent, construction costs are rising and households are borrowing more on the back of rising house prices, all pointing to risks of rising inflation.
The Reserve Bank's speed limits on low deposit home loans are already driving up interest rates, and higher fixed term mortgage rates could slow down house price rises, economists say.
The Reserve Bank's Monetary Policy Statement on Thursday is widely expected to see interest rates remain on hold, with the first move not expected till perhaps March next year.
The central bank is expected to take a "wait and see" approach to determine if the house market will cool down in the face of bank loan restrictions and higher fixed term mortgage rates, Westpac Bank said. Either or both of these developments, pushing mortgage rates up for some, has the potential to slow house price inflation.
"But it is too soon to discern the magnitude of any impact just yet," Westpac chief economist Dominick Stephens said. The impact of LVR (loan-to-valuation) limits was "highly uncertain" but with inflation still under 1 per cent and expected to rise only slowly, the central bank had time on its side. That mean rate rises would come, but not this year, Westpac said.
ASB Bank expected the first move up in official interest rates in March next year, from 2.5 per cent to a peak of just 4 per cent by late 2014, but if the LVR limits did not have an impact, rate rises could be more aggressive, going up sooner or faster.
The Reserve Bank is expected to formally include expectations of the dampening impact on LVR limits in its forecasts this week. It may scale back earlier forecasts of house prices rising by 11 per cent. Reserve Bank research suggested house price inflation could be one to four percentage points lower in the first year.
Rapidly rising house prices and the Canterbury rebuild threatened to spark inflation, but the high New Zealand dollar has so far kept inflation under 1 per cent in the past year. But since June, the dollar has fallen about 5 per cent, construction costs are rising and households are borrowing more on the back of rising house prices, all pointing to risks of rising inflation. On the other hand, wage inflation is low.
House prices were up 8.1 per cent in the past year, according to QV figures, driven by rapidly increasing prices in Auckland and Christchurch especially, with modest rises elsewhere.
While borrowers are spending less of their disposable incomes on mortgage debt than any time in the past decade, the tide is turning on the lowest interest rates seen in 50 years, especially for those with a small deposit, typically first home buyers.
From October 1 the speed limit on high loan-to-value ratio lending will come into force. From then, no more than 10 per cent of a bank's new home lending can be at an LVR of more than 80 per cent. In other words, more borrowers will need to raise a 20 per cent deposit.
Banks are already tightening lending rules to squeeze demand for low deposit lending, with borrowers with little of their own money facing higher interest rates.
On Friday, Kiwibank said it was limiting its one-year fixed mortgage rate of 4.89 per cent to customers who had built up at least 20 per cent equity. Those that do not qualify will have to pay 5.25 per cent.
Earlier last week, ANZ bank, the nation's biggest lender, was the first to hike its fees, with its largest "low-equity premium" jumping from from 1.25 per cent to 2 per cent.
All four big banks have recently raised their fixed term mortgage rates as overseas funding costs have gone up. Two-year fixed rates have risen about 30 basis points to almost 6 per cent, with longer terms now 6.5 per cent and higher.
But it remains unclear how much impact the new speed limit will have on rising house prices.
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