Reserve Bank says price drop ‘won’t take much’

Reserve Bank governor Adrian Orr has warned there is a risk of a correction to house prices, following the fall in the Sydney market.

The bank also remained concerned that if it removed loan to value ratios, lending might increase, meaning prices would rise faster than expected.

‘‘On the downside risk, asset prices very rarely smoothly transition back to some steady state level,’’ Orr told Q&A.

House prices across New Zealand have risen strongly over the past three years, but price growth has dropped sharply in Auckland in recent months.

They were ‘‘within a wisp’’ of falling in Auckland and it would not take much for prices to fall at least slightly.

It was possible prices could match the 5 per cent fall seen in Sydney, where some commentators predict a 15 per cent drop.

‘‘You could see a similar fall. That’s not in our projections, though. I mean, it’s certainly within a realm of possibility. Likewise, you could see a rise.’’

Orr said the amount of wealth tied up in housing in New Zealand was likely to remain high even if prices did fall.

‘‘Even if house prices did come off from some level, the level of house prices relative to income is still highly elevated, and there is an enormous amount of total New Zealand wealth captured in the equity in the homes they own,’’ he said.

‘‘A house-price decline does not mean a housing market crisis. Far from it.’’

Households should be more focused on what they could afford to pay on mortgages.

‘‘The number one thing a household needs to think about is not necessarily, ‘What price is my house’, but, ‘Am I going to be employed? Can I afford to continue to pay that mortgage?’ And that is the area where we are very comfortable in.’’

In the coming months the Reserve Bank would again review whether to further relax LVRS, with an announcement on any move likely in mid-october.

Orr said there had been months of slow house-price increases since the last decision, but he was also mindful that when the Reserve Bank set the LVR rules, the banks tended to move back to the levels it imposed.

‘‘And so I keep thinking, ‘Why do we have to be the ones putting these restrictions on all of the time?’ Why can’t they be responsible around lending to people who truly can afford, through good times and bad, to meet that debt?’’