Has the RBNZ gone too far?

Activity in the housing market has begun to decline following the introduction of the Reserve Bank Of New Zealand’s (RBNZ) High Loan-To-Value (LVR) regulations. National dwelling sales have fallen from 18.8% YoY at the start of October, to being firmly in negative territory since November last year, current figures show a drop in activity by 4.3% YoY in January. Meanwhile, new dwelling consents (New builds are not subject to current LVR restrictions) are soaring, up 39.3% YoY for the December month.

Residential credit has been severely restricted to new and existing low deposit borrowers, and by excluding new builds from LVR regulations, the RBNZ has taken the first step in solving the low supply/high demand issue within the housing market, reducing systemic risk to the banking system. In a speech in August last year, RBNZ governor Wheeler outlined his intention behind creating the LVR restrictions, “The LVR restrictions are designed to help slow the rate of housing-related credit growth and house price inflation, thereby reducing the risk of a substantial downward correction in house prices that would damage the financial sector and the broader economy.” So the latest figures from the REINZ should come as no surprise as national house prices have begun to fall with sales activity, the most recent figures released on January 31st show a drop of 2.4% MoM, bringing the YoY figures for January to 7.7%.

Within the context of the housing market, it would appear the RBNZ is getting exactly what they wanted, they are reducing leverage in the market, slowing house price inflation and channeling credit toward the supply of new dwellings. However within the context that includes the broader economy, they may begin to rethink the LVR restrictions completely, as by restricting residential credit to reduce systemic risk, they may actually ignite the risk they were so desperately trying to avoid.

Retail Sales vs REINZ House PricesAs house prices have begun to slow, so too have the credit-driven retail sales, which missed economists expectations today (1.2% vs 1.7% expected). The LVR has already begun to have an effect in softening house prices, but as the feedback loop between perceived values and risks begins to take hold, most cyclical indicators should also follow prices lower, providing the RBNZ with plenty to think about in regard to policy action for when and how to raise interest rates (or whether to begin to ease policy lower by 25-50bp).

Confidence Vs Manufacturing

As the general consensus believes official interest rates will rise in March this year by 25bp, in the face of falling house prices, retail sales, consumer confidence and manufacturing PMI’s (soon to be released), the RBNZ will most definitely be on pause, rather than looking to begin a tightening cycle to contain an inflation threat.

CS1YRBNZ Index (RBNZ Chance of P 2014-02-17 16-40-09

With 121bp of hikes currently priced into interest rate markets for the next 12 months, the perception of interest rate increases seems far removed from the reality of the situation, and that the Kiwi dollar may soon be in for a tumble as these new risks emerge, and old expectations are removed.

Scott Burgess

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One thought on “Has the RBNZ gone too far?

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