Graeme Wheeler defends decision to lower OCR

Reserve Bank governor Graeme Wheeler has defended the decision to lower the Official Cash Rate amid concerns it could worsen the unaffordability of house prices in Auckland.

The bank lowered the Official Cash Rate this morning, which Opposition MPs said was like pouring petrol on an overheated Auckland housing market.

Several banks have responded to the change in the OCR by lowering floating mortgage rates.

Appearing before a select committee this afternoon, Mr Wheeler said officials had "thought a lot about the Auckland house price situation" because of the expected impact on mortgage rates.

He said officials were concerned about house price inflation of 17 per cent in the city and a house price-to-income ratio of 7.5.

But he said these problems were mostly limited to Auckland, and the bank had already introduced measures to combat this.

"It's very much an Auckland issue and that's why we moved on the macro-prudential side in respect of investor-related lending and a 30 per cent deposit requirement."

Mr Wheeler said the bank's new measures, coupled with the Government's crackdown on speculators and foreign buyers would help slow the housing market.

However, these changes alone would not fix the housing problem, he said.

"They will help reduce house price inflation in Auckland ... but we really believe that more supply is needed to solve the Auckland problem."

Mr Wheeler said increasing housing supply was "critical", and noted how growth in supply had pulled house inflation in Christchurch back to 5 per cent.

He repeated his warning about the potential for a housing correction if prices continued on the same trajectory.

"The worry would be if it continued to increase at the sort of rate that it has been going out for a period of time, you would have to think that the risk of a substantial adjustment are serious."

The governor wanted house price inflation to fall so that it was in line with wage growth, which was currently between 4 and 5 per cent.

Eventually, he would like house price inflation to grow less rapidly than incomes.

Prime Minister John Key disagreed that the Reserve Bank's rate cut would worsen the housing problem.

He cited Mr Wheeler comments that Government's changes were likely to have a positive impact on housing affordability.

"So that gives him some room to lower interest rates," he said, saying that this was vindication for the steps Government had made.

Mr Key agreed that encouraging supply was "the single biggest thing we can do" and pointed to the Government's establishment of fast-tracked housing areas.

The Reserve Bank's latest figures also showed greater participation in the workforce by elderly people and women.

Green Party MP Russel Norman asked the governor whether this was because house prices were so disproportionate to wage rises that more people had been forced back into work to cover costs.

Mr Wheeler responded: "This is possible".

He said the stronger economy meant there were more opportunities for people to work.

"But it could well be the reason you've mentioned," he added.