A surging New Zealand housing market that has sent prices to record levels is jangling nerves at the central bank, prompting warnings of asset bubbles that may need rate rises and moves to rein in bank lending.
The Reserve Bank of New Zealand's growing worries about the bubbling property market were obvious this week when the deputy governor bluntly stated the rise in house prices was increasing inflation and financial stability risks in the economy, and might force faster hikes in RBNZ interest rates.
"The Reserve Bank's flat interest rate outlook in our recent monetary policy statement would need to be revisited," said Grant Spencer, RBNZ deputy governor and head of financial stability.
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The bank has kept its official cash rate (OCR) on hold at a record low 2.5 percent for the past two years, and last month indicated it expected to hold the rate through the rest of 2013.
It has no need to start hiking yet, given the benign inflation outlook, and will also be mindful against further boosting the rocketing New Zealand dollar, which has gained 5 percent against a basket of currencies in a month to a record high, adding to the headwinds for the export-dependent economy's recovery from the global financial crisis.
Efforts to keep a lid on the local currency, nicknamed the kiwi, were further complicated by the Bank of Japan's move this month to flood the economy with $1.4 trillion of monetary stimulus.
Offshore investors able to borrow cheaply at home have long targeted New Zealand for its high-yielding assets, with 10-year government bonds paying a tempting 3.4 percent even when benchmark interest rates are at record lows.
Analysts say the central bank has a delicate balancing act between imposing higher rates and the impact those rates would have on the economy and currency, which is currently a major factor in keeping a lid on inflation.
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"Their (the RBNZ's) comments suggest they have incorporated current strength in the housing market. Given the currency strength they're not considering hiking the OCR soon, they're considering sometime in 2014," said ASB Bank senior economist Jane Turner.
Earlier this year, RBNZ Governor Graeme Wheeler largely dismissed any prospect of the bank bringing down the overvalued currency.
Pockets of Peak Demand
In an attempt to counter the spike in house prices, the RBNZ is busy finalizing a set of macro-prudential tools, including loan-to-value ratios and increased bank reserves, which could supplement the more blunt weapon of raising the OCR.
Bank lending standards, which had tightened markedly after the global crisis, have started to relax with variable mortgage rates at their lowest in decades as lenders chase market share.
That prompted the Fitch ratings agency this week to warn of the dangers of asset bubbles, saying any significant downturn would be a risk to the AA-minus rating for the four major, Australian-owned banks, which have around 85 percent of the home loan market.
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The surge in prices has been led primarily by gains in the biggest city of Auckland and the earthquake-damaged region of Canterbury, with shortage of supply a key factor.
Auckland's median price has risen 11 percent in the past year, with some parts of the city now nearly 20 percent above the last market boom in mid-2007.
One factor being singled out for stoking the Auckland market in particular is a perceived increase in the number of Asian buyers, notably Chinese, who are said to be outbidding "locals" and forcing up prices.
Part of the increased Asian interest is said to have been prompted by moves in Singapore and Hong Kong to cool their markets with higher taxes on house purchases, increased down-payments on loans, and controls on foreign buyers.
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There are no restrictions on foreign buying of houses or urban property in New Zealand, which only fuels the talk of Asians filling auction rooms and winning most bids.
Bank of New Zealand chief economist Tony Alexander said the anecdotes are likely to be exaggerated and ignore the fact that New Zealand has a significant Asian population.
A survey of real-estate agents last month suggested foreigners made up around 9 percent of buyers, with British outnumbering Chinese, closely followed by Australians.
"It would seem better to address the issue now before the anecdotes coalesce into a nationalistic backlash and outright blaming of Chinese buyers for the housing crisis," said Alexander.
The real estate industry is keen to stress that localized housing shortages are driving much of the rise in prices.
Helen O'Sullivan, the chief executive of the Real Estate Institute of New Zealand, said around 90 percent of the rise in the national median price over the past year was from the two main cities, both of which have significant supply shortfalls.
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New Zealand has 1.8 million homes for its 4.4 million people and has been failing to keep up with demand growth, building around 18,000 new dwellings a year.
"Across the rest of the country while activity is picking up, price gains are far more modest.
"Regions, representing 24 percent of sales in March, recorded annual price increases of less than 1.0 percent," O'Sullivan said.