RBNZ hawks-up as house prices rebound

By Leith van Onselen

The Real Estate Institute of New Zealand (REINZ) has released its November house price results, which registered a strong monthly rise in values and an acceleration in annual growth.

In the month of November, the national stratified median price rose by 3.3% to nearly $464,000. Prices rose by 2.5% in Auckland, 3.5% in Christchurch and 0.3% in Wellington. Over the quarter, prices rose by 4.9% nationally, with increases recorded in each of the major capitals.

ScreenHunter_5392 Dec. 11 08.03

The price changes are shown more clearly in the below chart, which shows the values in index form since 2005:

ScreenHunter_5393 Dec. 11 08.04

Annual house price growth rose to 6.0% nationally in the year to November 2014 to be 21.8% above the November 2007 peak. Prices in New Zealand’s largest city, Auckland, rose by 9.4% in the year to November to be 42.4% above their July 2007 peak. This was followed by New Zealand’s second biggest city, Christchurch, where prices rose by 9.2% over the year to be 28.8% above their 2007 peak. Finally, prices in the capital, Wellington, actually fell by 1.6% over the year to be 3.6% above the September 2007 peak.

The below chart shows the annual price growth in trend terms (3-month moving average) in order to smooth volatility, with annual price growth clearly turning up, driven by Auckland:

ScreenHunter_5395 Dec. 11 08.07

The RBNZ’s macro-prudential curbs on high risk mortgage lending, along with more recent interest rate increases, had done a good job in slowing the New Zealand housing market.

After the macro-prudential curbs were implemented in October 2013, both New Zealand mortgage debt-to-GDP and house price growth turned down (see below charts).

ScreenHunter_5398 Dec. 11 08.15
ScreenHunter_5396 Dec. 11 08.12

However, the combination of record immigration and national income growth, along with falling unemployment, appear to now be taking over.

Other indicators support this contention. Housing loan approvals began to rise in August:

ScreenHunter_5400 Dec. 11 08.18

As have housing transactions, which rose 6.5% in the year to November 2013, according to the REINZ.

Ultimately, New Zealand requires structural reforms to the housing market to improve affordability. These include implementing the National Government’s proposed supply-side reforms, as well as tax reform to remove the favourable treatment of housing as an investment class (including the quarantining of rental losses, so that they can only be claimed against income/capital gains from the same asset, as well as implementing a capital gains tax on investment assets).

It’s no wonder that the RBNZ has surprised markets this morning. From Westpac:

The RBNZ’s Monetary Policy Statement this morning kept the OCR unchanged at 3.50% as expected, but reinforced its explicit tightening bias – a hawkish surprise to the markets.

The most important change, from the market’s point of view, was a reinsertion of the explicit tightening bias into the one-page press release: “Some further increase in the OCR is expected to be required at a later stage.” This explicit bias was removed from the press release in October. The market was looking for a further watering down of the implicit bias.

As expected, the RBNZ downgraded the interest rate forecast. Compared to the September forecast, it is now 36bp lower at the Dec 2016 point. However, since the market was already priced 60bp lower, this shift was market neutral.

The previous warning about the high NZD exchange rate was repeated: “The exchange rate does not reflect the decline in export prices this year and remains unjustifiably and unsustainably high. We expect to see a further significant depreciation.”

Market reactions to the MPS were mixed. NZD/USD jumped from 0.7690 to 0.7822, probably reflecting market positioning. However, given interest rates have hardly moved, we expect the upside to be limited. AUD/NZD fell from 1.0780 to 1.0620 where it should find some support.

Interest rate markets decoupled from the currency, probably an expression of scepticism. The NZ 2yr swap rate actually fell 0.5bp from 3.815% to 3.810%. We expect it to continue to price out tightening, and thus gravitate to OCR + premium = 3.70% during the months ahead. The next major technical level of yield support is 3.75%.

The 2-10yr swap curve was little changed from 45bp and should remain so.

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