Canterbury region seen as inflation trigger by Reserve Bank

16:00, Jan 31 2014

Inflation pressures from the strong Canterbury economy and Christchurch rebuild are rearing up as a concern for the Reserve Bank.

The central bank is worried that inflation pressures are increasing in the construction sector, as labour and services are shifted to work in Christchurch and Auckland from other regions.

Reserve Bank governor Graeme Wheeler yesterday picked 2016 and 2017 as a peak for annual construction investment in the reconstruction, with around $4 billion to be spent each year.

"There's a lot of pressure starting to build up on the construction industry, and a lot likely to build up over the next three years as investments peak in Canterbury," he said to a function hosted by the Canterbury Employers' Chamber of Commerce.

The bank has signalled that interest rates are very likely to rise soon, which will impact those homeowners with mortgages, to help rein in inflation.

New Zealand construction investment has increased 40 per cent over the last two years largely because of the Canterbury rebuild, Wheeler said.


If targets including 12,000 new homes predicted to be constructed in Christchurch were met, then construction volumes would need to be 10 per cent higher than the last peak in 2004.

"On a global scale, the Canterbury earthquakes are among the 10 costliest natural disasters in recent history," Wheeler said in his first major speech of the year.

He reiterated the bank's view the rebuild will cost around $40 billion at current prices, or around 20 per cent of annual gross domestic product.

"Now increases in the prices of construction and services in Canterbury, in many respects a good thing, because they're needed - and I'm speaking as an economist - to attract resources into the rebuild," he said. "But a key issue is whether those costs start spilling over into other sectors and regions, and there are signs this is starting to happen."

Annual New Zealand construction cost inflation was running at 5 per cent, though it was about double that in Canterbury.

Employment in the construction sector was currently 9 per cent below its 2006 peak.

"But recall it's probably another two to three years before construction activity peaks in Christchurch," Wheeler said.

The New Zealand economy was growing at around 3.5 per cent and likely to continue to grow at 3.5 per cent for at least the next 12 months.

The benefits of sustainable growth were eroded when inflation and inflation expectations became excessive.

Christchurch house prices in the fourth quarter of 2013 were 10 per cent ahead of the fourth quarter of 2012, and those in Auckland up by about 14 per cent and inflation also strong in other regions, he said.

Auckland mean house prices were now about 28 per cent above the 2007 peak, while in Christchurch they were 15 per cent above that peak.

Households also had high debt levels, at about 150 per cent of household disposable income.

The central bank this week left official interest rates on hold at 2.5 per cent, but sent a strong signal that rates would rise soon.

Most economists say a rise in March is almost certain.

The bank last October introduced limits on how much low deposit lending banks may do, partly to decrease risks of house price moves impacting the economy.

"The information to date suggests that housing turnover and the rate of house price inflation may be starting to ease. But that could be due either to LVR restrictions themselves or other factors such as house affordability," Wheeler said.