New Zealand housing market cooling, but immigration risk remains: Reserve Bank

The Reserve Bank of New Zealand ( RBNZ) could lift mortgage lending curbs imposed in October last year by the end of this year as the country's potentially destabilizing housing market begins to cool, a senior Reserve Bank official said Friday.

The volume of house sales had dropped considerably across the country, other than in earthquake-battered Canterbury, and the slowdown in volume had also been reflected in prices, RBNZ deputy governor Grant Spencer said.

"Without the loan to value ratio restrictions (LVRs), introduced in October 2013, annual house price inflation might be running some 2.5 percent higher," Spencer said in a published speech in Auckland.

Housing supply conditions had also started to improve, with a recovery evident in residential construction, but the shortage was still large and significant increases in building were needed in the largest city of Auckland and in Canterbury.

"There are many parts to the housing market equation and many risks. Probably the major risk at present is the outlook for net immigration, in part due to reduced departures of New Zealand citizens. We are forecasting net immigration to reduce gradually as economic conditions improve in Australia," Spencer said.

"We've started raising the official cash rate (OCR), with the aim of forestalling general inflation pressures in the broader economy. Floating mortgage rates could be 7 to 8 percent in two years time, closer to their average of the past 20 years."

Before lifting the LVRs, the Reserve Bank wanted to be confident that the housing market was responding to interest rate increases, and that immigration pressures were not causing a resurgence of house price pressures.

"It will take some time to gain this assurance. At this stage we consider the earliest date for beginning to remove LVRs is likely to be late in the year," said Spencer.

The RBNZ imposed the LVRs, restricting most mortgages to 80 percent of a home's value, arguing that the soaring housing market was a threat to the country's financial stability.

It has also raised interest rates twice by 25 basis points this year to put the OCR at 3 percent.