AUCKLAND • Surging house prices in Auckland pose an increased risk to New Zealand's financial stability but the central bank cannot raise interest rates to curb demand, deputy governor Grant Spencer said.
"When something keeps you awake at night, it is good to do something about it," Mr Spencer said in a speech published on the website of the Reserve Bank of New Zealand (RBNZ) yesterday.
The response must be multifaceted because "the current weakness in export prices, economic activity and CPI inflation means that interest rate increases are likely to be off the table for some time", he said.
House prices in Auckland, home to a third of New Zealand's 4.5 million population, surged 21 per cent in the year to July amid a housing shortage and record immigration.
The RBNZ has nevertheless cut the official cash rate (OCR) twice in the past two months to stimulate the slowing economy and boost inflation from near zero.
It will cut the cash rate by another 25 basis points to 2.75 per cent at its next policy decision on Sept 10, according to 16 of 17 economists surveyed by Bloomberg, with one forecasting no change.
"The Auckland housing market is unlikely to be a barrier to further OCR cuts," Mr Michael Gordon, senior economist at Westpac Banking Corp in Auckland, said. He expects the cash rate to fall to 2 per cent next year.
The RBNZ recognises that low interest rates are contributing to housing demand pressures and this is a factor it takes into consideration when setting monetary policy, Mr Spencer said. The resurgence in Auckland house prices has increased the bank's concern about financial stability, he added.
"Investors are now accounting for 41 per cent of Auckland house purchases, up 8 percentage points since late 2013," Mr Spencer said.
From Nov 1, the RBNZ will require Auckland property investors to have a deposit of at least 30 per cent to secure a mortgage. The government has also said it will tax capital gains on property held for less than two years from Oct 1.
While these policies may help to reduce imbalances in the Auckland market, "much more rapid progress in producing new housing is needed in order to get on top of this issue", Mr Spencer said.
There have been some signs in recent months of housing demand spilling out of Auckland and starting to fuel price increases in the neighbouring cities of Hamilton and Tauranga, he said, adding that if this persists, the removal of restrictions on low-deposit lending imposed by the RBNZ in 2013 could be delayed.