New Zealand’s runaway house prices could be brought back to earth by low net migration if the coronavirus pandemic keeps the country’s borders closed, according to the central bank’s deputy governor.
Geoff Bascand told the Financial Times that if house prices cool down faster than expected, it could affect the Reserve Bank of New Zealand’s forecast for rapid interest rate rises next year.
If New Zealand was slow to reopens its borders and more of its residents have relocated abroad, which could put a check on population growth and reduce the demand for housing, he added.
Bascand’s comments address the challenge for central banks in inflation forecast as reopening of pandemic restrictions affects supply and demand for goods.
“If population growth remains very slow, the housing market could recover a little faster,” says Bascand, who is expected to resign from his role in January after nearly a decade as deputy.
Faster cooling of house prices will take into account the RBNZ’s decision-making on interest rates, together with the global economic outlook, the strength of domestic demand and capacity pressures from scarce labor supply, he added.
The Omicron coronavirus variant poses an additional risk to inward migration if the government postpones easing border restrictions.
The RBNZ interest rates have risen in November by 25 basis points to 0.75 per cent, its second rate hike in as many months as the economy began to overheat. The bank projected that rates would reach 2 percent by the end of 2022 and reach a high of 2.6 percent by December 2023.
The RBNZ also predicts that net migration will gradually increase to about 24,000 people per year as border restrictions ease, but this will depend on a reopening for international travel. Net migration is currently slightly negative.
Lower migration would reduces the demand for housing but it will also reduce the supply of labor. “Exactly how it plays out in terms of inflationary pressure will be interesting to see,” Bascand said.
For the first time in decades, New Zealand’s housing stock is expected to be balanced once current construction projects are completed, making net migration all the more important.
The central bank predicted that annual house price growth would slow to 6 percent by the end of 2022 from 30 percent by the end of 2021. From late 2022, it expects house prices to fall modestly.
On a two- to three-year horizon, Bascand said it is difficult to see what house prices will stop given rising interest rates, slow population growth and continued house building.
New Zealand house prices have risen sharply over the past two years, rising 28.4 per cent year-on-year in November, according to CoreLogic’s house price index. Price increases continued despite government launch stricter tax policies on rental income and on capital gains, and the RBNZ tightening loan-to-value constraints back to levels previously imposed in 2016-2017.
The RBNZ considers the current levels of house prices to be unsustainable and a threat to financial stability. It consults on new residential mortgage restrictions, which will consist of two instruments: debt-to-income ratios restrictions and a floor on interest rates that banks must use to test whether a borrower can afford a mortgage.
It plans to use the interest rate floor as a transitional instrument if necessary, as the DTI limits will take longer to implement. Bascand said the interest rate floor could be implemented “relatively quickly, possibly within three to four months”.
Even with headline inflation in New Zealand running close to 5 per cent, the RBNZ believes the public’s expectations of future inflation are well anchored and insists it has a low appetite for any policy that jeopardizes it.
Signals that the public has begun to expect higher inflation “will be a significant factor in our decision-making,” Bascand said. “If we thought [expectations] become anchored, it would be a concern. ”
Bascand acknowledged the risk that high inflation could affect public expectations. “We think there is a risk that wage and cost pressures could rise and make people think there will be more inflation,” he said. However, rising mortgage rates will counteract that concern as they begin to bite into the housing market.
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