Worries over overheated house market

16:00, Feb 01 2013

A 12 per cent annual increase in the price of Canterbury houses has prompted the governor of the Reserve Bank to offer the strongest hint yet that action is needed to ease the pressure on New Zealand's "booming" housing market.

Speaking yesterday to business leaders in Christchurch, Graeme Wheeler said the bank was keeping a very close eye on the housing market and its impact on inflation.

Wheeler noted the pressures in Canterbury prices with a 12 per cent annual rate of increase, and in Auckland where the annual level of increase has fallen back from a 10 per cent to 12 per cent peak to 8 per cent.

The increase in house prices in the rest of the country was about 5 per cent, he said.

The bank was mindful about the pressures that could come from a "housing boom", as well as inflation, higher construction costs and the impacts on people's wealth.

"We're monitoring the situation very carefully."


Wheeler's comments are the strongest signal yet that officials are extremely concerned about housing affordability.

Canterbury economist Robin Clements said, however, that the housing market, which is already difficult for those seeking a home, will become tougher for those paying off a mortgage when interest rates rise from historic lows.

"The current situation if you're a mortgage holder, you're looking good because your debt servicing is relatively low and your assets are getting more valuable. If you're not an owner you're not benefiting from that.

"The reality is [the governor] will respond at some point in time which will make it more expensive to service the debt, but start to put a lid on the price."

The Reserve Bank kept the official cash rate unchanged at 2.5 per cent this week.

Yesterday Wheeler also said Kiwis had a poor savings record, well below the average of other OECD countries.

The Reserve Bank would consult with financial institutions next month on the potential use of economic instruments designed to increase the resilience of the financial system to shocks and dampen the financial cycle during times of concern.

Speaking to The Press last night, Cantabrians Brian Taylor, 63, and his partner Pam Crosswell said the Government needed to keep a closer eye on inflation.

The couple said they had to find an extra $60,000 to replace their home which was wiped out in the February 22 earthquake.

"I'd like them to come up with a new housing plan as well, so everybody can actually afford it."

It would be particularly difficult for first home buyers to get into the current market, Taylor said.

"I think those people will be struggling for years to come."

Taylor and Crosswell took the Government valuation offer on their red-zoned home in Bexley but because of price rises, needed to borrow to fund a new house.

Their new house in Kaiapoi had the same square footage as their home in Bexley.

A spokesman for Minister of Finance Bill English said Mr English was keeping an eye on the housing market, but could not give any guidance on which of the macro-economic tools might be favoured.

The Government had tried to improve housing affordability by "looking at things like land supply, the timeframe and cost of consenting, and provision of infrastructure", the spokesman said.

Realestate.co.nz data shows the mean asking price in Canterbury in January was $402,742, up 8 per cent from January 2012. That does not include properties going to auction.


Annual house price rate of increase according to the Reserve Bank:

- Christchurch about 12 per cent.
- Auckland less than 8 per cent.
- Rest of New Zealand 5 per cent.

Impact on average Kiwi:

- Makes houses less affordable as prices outstrip wages and salaries.
- Higher mortgages result in extra monthly mortgage payments.

Impact on business community

- Inflation could see Reserve Bank raising interest rates, making it more expensive for businesses to invest.
- Higher interest rates tend to drive the Kiwi dollar higher, making New Zealand exporters less competitive.

The Press