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Bank expects action on the housing boom this year

ASB economists expect Reserve Bank governor Graeme Wheeler to reach into his new toolbox this year to counter housing market-driven credit growth.

Tuesday, January 8th 2013, 12:30PM

by Susan Edmunds

They say credit growth won’t need to get anywhere near the levels of the last housing boom before the Reserve Bank starts reaching for macroprudential tools to counter it

ASB chief economist Nick Tuffley said the Reserve Bank would become less tolerant of the house price momentum building in Auckland and Christchurch, which is showing signs of spreading to other parts of the country. He said it posed a risk to both monetary and financial stability.

The macroprudential tools the bank is developing would be a way to ease the property market pressure without dampening other parts of the economy, which are already struggling. Q3 GDP figures were low compared to expectations and economic growth has proved to be weaker than predicted.

Tuffley said that weak growth would make Wheeler reluctant to raise the official cash rate until the end of this year at the earliest.

But before that, he would likely use tools such as core funding ratios, cyclical capital buffers, or loan-to-value restrictions to rein in the housing market. “We’ll hear more this year on what the Reserve Bank is looking at, and deciding what is in its tool kit, but those are the three main ones.”

He said Wheeler would look to the tools as soon as credit growth started to look excessive. “That means trying to delve into what excessive means but it’s likely to be a lower level than we’ve seen in the past.”

Tuffley said that while the last asset price boom resulted in double-digit credit growth, this time around growth would not need to be near double digits before the Reserve Bank would act.

“Some tools are likely to be resorted to more than others and some will be used when nothing else seems to be working.”

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Westpac predicting rates to rise faster than forecast

In its recently released quarterly economic overview report, Stephens writes that Westpac’s prediction is for 90-day interest rates to rise much faster than either the Reserve Bank or the market expects.

It picks the first move in interest rates to happen in June 2013, when it says the OCR will still be at 2.50%.

By 2014, Westpac expects 90-day rates to be 4%. By comparison, the RBNZ tips them to have barely moved at 2.75% and the swaps market implied pricing puts them even lower, at just over 2.50%.
By 2015, Westpac expects rates to be over 5%.

Stephens’ report said that the Christchurch rebuild would make it hard for New Zealand to avoid substantial inflation.

“The inflation figures suggest that central co-ordination of small to moderate repairs – the bulk of the activity to date – has been effective in limiting construction cost inflation. This is unlikely to remain the case as major repairs and rebuilds take over as the main form of activity.”

He pointed to the fact that new housing in the Canterbury region has already risen roughly 10% over the past year.

Stephens said he expected home loan rates to follow the same trajectory as 90-day rates. They might stay on hold for another year or so but then would have to rise.

“Floating rates may not rise quite as rapidly as 90-day rates because at the moment banks have to pay a higher margin to procure funds from overseas. That pressure might come off.”
But he said it was unrealistic to expect the current historic lows to continue past 2013.

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