The unsustainable level of house prices poses monetary and financial stability challenges, Reserve Bank of New Zealand – Te Pūtea Matua – Governor Adrian Orr says in a speech published today to the Property Council of New Zealand Retail Conference.
“It will come as no surprise to you that in our forthcoming Financial Stability Report we will again elaborate on why we view the level of house prices as unsustainable, and why this matters,” Mr Orr says.
The speech focuses on:
- Why the Reserve Bank cares about the level of house prices and the concentration of housing in both household and bank balance sheets;
- The drivers that continue to lead to volatile house prices; and,
- What is and can be done to promote a better functioning housing market – and hence more sustainable house prices – over time.
“At the source of the financial stability risk is the inability of housing supply to respond in a timely fashion to changes in demand, and the drivers that lead to a bias towards housing as an investment choice beyond simply a place to reside,” Mr Orr says.
Solutions to these issues are both available and being implemented. These solutions are simple, if not easy.
“There is no one agency or silver bullet. House prices and housing affordability are affected by both supply and demand factors, ranging across immigration, tax policy, government benefits or transfers, land availability, building standards, infrastructure, and training programmes.
Ultimately, it is access to land and space that has recently proved to be the biggest challenge to enabling a smooth functioning housing market,” Mr Orr says.
The Reserve Bank has also published an Analytical Note: Measures for assessing the sustainability of house prices in New Zealand.
The suite of indicators considered in the note suggest that house prices have become more unsustainable over the past 12 months. As households are having to borrow more debt relative to their income to purchase a property, household incomes may become stretched when interest rates normalise. Continued strength in housing supply could also see the sustainable level of house prices decline over coming years.
