House price growth to slow over coming years, RBNZ says

The Reserve Bank expects house prices will rise at a slower pace in coming years as increased construction helps ease supply constraints, and measures to curb property investors take some of the heat out of the Auckland property market.

The bank anticipates measures to impose lending restrictions on property investment loans and more rigorous taxation of speculative investment will suppress house price inflation in the first year of their implementation, slated for an October start, while the recent appreciation in house prices will have encouraged construction to help fill in the supply gap.

Governor Graeme Wheeler cited Auckland's housing market as the biggest risk to the financial system last month, as cheap money, high net migration and a shortfall of supply after successive years of under-investment created tight competition and drove up prices. Wheeler already took steps to cool the housing market in 2013 when he first introduced loan-to-value ratio lending restrictions on residential mortgages.

"House prices in Auckland continue to increase rapidly, and increased supply is needed to address this," Wheeler said at today's monetary policy statement. "The proposed LVR measures and the government's tax initiatives planned for 1 October 2015 should ease the impact of investor activity."

The property market has been a thorn in the side of Wheeler since his appointment, forcing him to juggle the competing tensions of trying to bring down a strong currency that has been kept imported inflation at bay, while refraining from cutting interest rates too low for fear of pouring fuel on to the Auckland housing market.

Borrowers were moving away from floating rate mortgages, with about 26 percent on variable rates in April, the bank said. One-year and two-year fixed rates were still the most popular among borrowers.

The bank's monetary policy statement said New Zealand's housing market continues to strengthen with employment growth, rising consumer confidence and lower mortgage rates, though the rise in house prices was seen as providing an incentive for firms to expand supply.