May 2016's Property Gazette

What's happening in the property market?

Auckland house prices are showing no signs of stabilising – March saw a 9% rise in Auckland’s raw median house price. We are now seeing Hamilton, Tauranga and as far away as Wellington and Dunedin grabbing the attention with Corelogic reporting a rising percentage of sales in provincial cities are going to Auckland buyers, mostly buying rental properties.

All this heat in the property market is putting the Reserve Bank in a difficult position. Its main task is to target inflation at between 1-3% over the medium term, but it is failing to do that. Annual inflation was 0.4% in the March quarter and has been below 1% for six quarters in a row. Inflation has been below the 2% mid-point specified in Reserve Bank Governor Graeme Wheeler’s Policy Targets Agreement with Finance Minister Bill English for more than four and a half years. That’s uncomfortably close to the medium term.

However, the Reserve Bank is also tasked with monitoring asset prices and keeping the financial system stable. It has been worried enough about the risks to financial stability from a possible fall in Auckland house prices to introduce two sets of controls on Loan to Value Ratios in the last three years.

Economists expect the Reserve Bank will have to cut the Official Cash Rate twice more in 2016 to 1.75% to meet its inflation targets, which would push fixed mortgage rates well below 4% and pour more fuel on the fire in that ‘halo’.

That’s why economists began talking in April about the possibility of a third round of lending restrictions later this year. They could include extending the 70% limit for rental property investors beyond Auckland and/or lowering the limit for Auckland investors to 60%. The Reserve Bank will have its first chance in a while to talk about this when it publishes its half-yearly Financial Stability Report on May 11.

Banks may not find it so easy to refuse to pass on all of further cuts this year, possibly as early as April 28. Those funding costs have dropped sharply through March and April.
 
The bottom line:

  • Inflation remains weak and deflationary headwinds continue to blow from the rest of the world, pushing down on interest rates.
  • The Reserve Bank is expected to cut by a further 50 basis points this year, possibly starting as early as April 28, and certainly from June 9.
  • Auckland’s housing market roared back with a vengeance in March and the ‘halo’ effect is spreading double digit house price inflation around the country. Economic growth is solid at 3% and net migration is at 100-year highs.
  • The Reserve Bank may choose to bring in a third round of lending controls to stop future rate cuts from adding fuel to the house price inflation. It may suggest or announce them on May 11.
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