The Reserve Bank is doing the best it can to give economic growth a chance by using bank lending restrictions to cool house price inflation. But OCR hikes have probably just been delayed no cancelled or scaled down.
Stronger population growth, Canterbury rebuilding, high export prices and a rebound in agricultural production point to economic growth accelerating to around 4%.
4% or so economic growth will consume the relatively small amount of spare capacity in the labour market reasonably quickly. This means token OCR hikes next year to moderate economic growth even if house price inflation wasn’t a problem.
The Reserve Bank (RB) perceives the 9.5% increase in the national average house price in the last year to be a sufficient threat to financial stability to warrant the introduction of the 1 October bank lending restrictions.
The RB estimates the restrictions will result in around a 5% fall in the number of dwelling sales. This means around 340 less per month versus recent experience of around 6,850 per month.
I estimate it will require around a 15% fall in the number of dwelling sales to achieve the cooling in house price inflation the RB desires (i.e. slowing it to 5% by March 2015).
The chart can be used to make a rough assessment of how much the number of sales needs to fall to achieve the desired cooling in house price inflation.
My assessment that sales will have to fall around 15% is based on a more detailed analysis of the demand-supply balance in the housing market than offered by the chart.
If the RB’s 5% assessment is roughly correct the bank lending restrictions won’t do enough. In addition, would-be borrowers will view the lending restrictions as unjust and with the help of financial innovation will in time find ways of circumventing them.
The RB’s new experiment has at least delayed the start of OCR hikes, but probably not changed the ultimate result much.
Written by Rodney Dickens. Visit www.sra.co.nz to learn about SRA Ltd’s services.
The chart shows the annual % change in the stratified median house price reported by REINZ (black line, left scale) and the two month average of the seasonally adjusted monthly number of dwelling sales reported by REINZ (red line, right scale).