Reserve Bank speech

Reserve Bank Deputy Governor Grant Spencer  gave a speech to Wellington Branch of the New Zealand Institute of Valuers tonight. He said that a range of factors had contributed to strong demand for housing, including record low interest rates, rising credit growth, and population increases.


New Zealand is experiencing a housing market boom. House prices are increasing at 13 percent per annum nationally, and at 15-20 percent in Auckland and close-by regions. Evidence from housing cycles in several advanced economies suggests that the longer this continues, the more likely there will be a severe correction.

The Reserve Bank is mandated to promote the soundness and efficiency of the financial system. Our concern is that a severe housing correction would pose real risks for financial system stability and the broader economy. The banks are heavily exposed to housing with mortgages making up around 55 percent of total assets. Household debt, at 163 percent of household income, is at a record level.

Many domestic and international factors are contributing to the strength of the market. The current record low interest rates are a world-wide phenomenon linked to post-GFC caution and very low inflation in the global economy. Also driving local housing demand has been an unprecedented net migration inflow over recent years reflecting New Zealand’s stronger economic performance relative to many other advanced economies.

While strong demand has been underpinned by low interest rates, rising credit growth and population increases, the housing supply response has been constrained by planning and consenting processes, community preferences in respect of housing density, inefficiencies in the building industry, and infrastructure development constraints. The resulting housing market imbalance has been exacerbated by New Zealanders’ on-going preference for investment in bricks and mortar over financial investments, due in part to the ready availability of credit and a tax system that favours debt funded capital gains.

Given the complexity of factors underlying the housing situation, there is no simple policy solution. We need to tackle housing on many fronts. The key challenge in the long run is to expand housing supply to meet the growing demand. The Reserve Bank has no direct influence over supply, but can influence housing demand through the credit channel.  The Bank’s interest rate policy is targeted primarily at keeping future CPI inflation between 1-and-3 percent on average over the medium term, although it must also have regard to the soundness and efficiency of the financial system. The Bank’s other relevant instrument is macro-prudential policy. This can improve the resilience of banks’ balance sheets on a lasting basis and help restrain credit and housing demand, at least for a period.

He then went into detail on:

  • Initial loan-to-value (LVR) restrictions
  • Recent worsening of housing imbalances

The he talked about a broad policy response being needed, and outlined the role the Reserve Bank can play.


In conclusion, the Reserve Bank is concerned about the risks to financial and economic stability inherent in the growing housing market imbalances. Auckland pressures are re-emerging following an easing in the market from late 2015, and house price inflation has accelerated in a number of regions.

The causes of the imbalances are complex with a number of important drivers on both the demand and supply side. Addressing these imbalances will require policy action by a variety of agencies on a number of fronts. The underlying housing shortage needs to be urgently addressed, particularly in Auckland where population growth continues to outstrip housing construction. A step up in supply is required and finalisation of the Auckland Unitary Plan will be a key opportunity to facilitate such a step.

On the demand side, the key drivers are population growth and easy credit. The low cost of credit is making higher debt levels affordable, particularly for investors who can deduct interest costs from taxable income. Residential investors are accounting for an increasing share of house sales and new mortgage credit.

The Bank’s interest rate policy must have regard to financial stability concerns, but the global environment is likely to keep interest rates low for some time yet. Macro-prudential policy can assist in containing the growing risk to financial stability as the current housing market reaches new extremes. In light of the growing risk, the Reserve Bank is closely considering measures that could be progressed in the coming months.

In short, it’s complicated with no easy or quick fixes.

Full speech: Housing risks require a broad policy response

Media release: Housing risks require a broad policy response

Leave a comment


  1. Blazer

     /  7th July 2016

    trying to jawbone prices down won’t work… something now.

  2. patupaiarehe

     /  7th July 2016

    I heard an interesting perspective on this today, from one of the rep’s I deal with. He reckons we should close the borders immediately, and keep them shut until this whole mess has been sorted out. He thinks that by doing this, demand would peak where it is now, and decrease over time as new houses are built. Personally, I disagree. If one takes a drive thru Tokoroa (for example), every second house is unoccupied. What we need from the government, IMHO, are tax incentives for business owners, to help them relocate their factories to areas where housing (and industrial land) is available, and cheap.

    • Brown

       /  8th July 2016

      I lived in Tokoroa for 9 months a long time ago when its a busy place. That was enough even then. The point is otherwise valid.


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