Reserve Bank of New Zealand Deputy Governor Grant Spencer said mortgage-lending restrictions introduced this month could ease upward pressure on the local currency by reducing the magnitude of interest-rate increases.
To the extent that the restrictions “dampen overall demand in the economy, they could also reduce the extent of interest-rate increases, and hence exchange-rate pressure, that may be needed over the coming cycle,” Spencer said in a speech in Auckland today, according to a text published on the Reserve Bank’s website. He reiterated that the RBNZ estimates the loan limits are the equivalent of a 30 basis-point increase in the official cash rate.
The lending limits, which took effect Oct. 1, mean that only one in 10 new mortgages issued by banks in New Zealand are allowed to exceed 80 percent of a home’s purchase price. The Reserve Bank introduced the limit in an attempt to cool the housing market without raising rates from a record low and denting an economic recovery.
New Zealand’s dollar was little changed after Spencer spoke, trading at 83.57 U.S. cents as of 10:35 a.m. in Wellington. The kiwi, which reached a 20-month high of more than 86 cents in April, has gained 8 percent against the greenback since Aug. 30, threatening to curb export receipts.
Spencer said allowing house and construction prices to spiral out of control “would risk spilling over into general inflation and put upward pressure on interest rates and the exchange rate.”
“Current imbalances in the New Zealand housing market present risks for both financial stability and price stability,” Spencer said. “To reduce those risks will require more responsive supply, as well as restraint on demand.”
Supply constraints in Auckland and earthquake-damaged Christchurch are fueling a housing boom. House prices rose 8.4 percent in September from a year ago, with prices in the Auckland region surging 13.6 percent, according to a government-owned property research company.
While estimating the impact of the new lending limits is “complicated,” Spencer said they are likely to curb house sales by 3 percent to 8 percent in the first year, and that house-price inflation should be 1 percent to 4 percent lower.
New Zealand house prices are likely to “remain high on most metrics,” so the lending restrictions shouldn’t materially reduce the incentives to develop new residential property, he said.
RBNZ Governor Graeme Wheeler has said the central bank is likely to start raising borrowing costs next year.
Chart: WorldWideMarkets Alpha Trader