Roger J Kerr likes the latest RBNZ approach to the Auckland property 'boom' but does see some risks with this new policy direction

By Roger J Kerr

In previous residential property boom periods in Auckland, the RBNZ response was to tighten monetary policy with higher interest rates as they feared the “wealth effect” on consumer spending would increase inflation above the 3.00% speed limit.

The wealth effect being house-owner’s ability to borrow more with the increased house value and then spend the new cash.

By making the price of money more expensive the RBNZ would slow credit growth and slow the economy. It was always the associated and resultant higher NZ dollar value; however that did most of the economic slowing.

There are many and varied reasons as to why the RBNZ on this current Auckland property boom have no fears of the knock-on inflationary impacts and therefore they have cut interest rates as other more negative and off-setting developments in the economy (e.g. dairy prices) take precedence.

  • Credit growth in the household sector on this cycle remains relatively subdued, reinforcing the view that a good part of the Auckland property demand is from immigrants and non-resident buyers who have cash.
     
  • The reasons behind the supply shortage of new houses in Auckland are well documented and ongoing; however the lower mortgage interest rates should assist to close the affordability gap for younger buyers.
     
  • The extraordinary house price increases allow older owners of residential property in Auckland to exit, downsize and re-locate to the provinces as the money equations allow them to enjoy options in this respect for the first time in many years. This section of society is hardly complaining about offshore buyers taking a liking to Auckland.
     
  • The RBNZ do have some helpers to monetary policy on this housing cycle in the form of bank lending regulations, taxation changes and fast-track property resource consenting arrangements. This was not the case in previous cycles.

So, sensible assessment that this property boom cycle is different to previous cycles and other pragmatic measures (outside interest rates) are now in place to control some of the excesses around the edges.

The Government and RBNZ are therefore hoping that the situation is containable and the property boom will not burst badly and adversely impact the wider NZ economy.

The risks, as I see them, to the overall strategy that is being adopted are twofold:

  • Local speculative property investors over-gear themselves as the record low mortgage interest rates allow this to occur. If and when the Chinese money inflows dry up for their own reasons, the housing demand/supply equation could swiftly shift the other way.
     
  • The RBNZ underestimate the speed of tradable inflation increases from the sharply lower currency value and non-tradable inflation returns to the norm of nearer 3.00% annual increases. If this scenario transpires into reality interest rates would have to be ramped up rapidly with some brutal consequences for the over-geared property speculators.

Let us hope for the economy’s sake that the above risks do not materialise, however it pays to be aware of them.


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Daily swap rates

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Roger J Kerr is a partner at PwC. He specialises in fixed interest securities and is a commentator on economics and markets. More commentary and useful information on fixed interest investing can be found at rogeradvice.com