House market peaking: Joyce

Finance Minister warns buyers about higher interest rates

Finance Minister Steven Joyce has cautioned potential property buyers from getting too comfortable with New Zealand’s historically low interest rates, saying they should consider whether any mortgage debt taken on is still affordable in three or four years if rates rise.

Speaking to Parliament’s finance and expenditure committee, Joyce said New Zealand’s housing supply shortage was shrinking given the country’s “biggest ever building boom” and there were signs Auckland’s property market was cooling.

All of that suggested “there’s not much upside in house prices”.

“The bigger risk that people should just think about is the potential for interest rates to now rise in the years ahead — we’re seeing that now in bond rates and that’s why I think it’s important people don’t overextend themselves at this point,” Joyce said.

“It’s often in the case of economics that once people have something for a while, whether it’s low oil prices, high oil prices, or low interest rates, they seem to assume it will last forever, but it doesn’t.”

Last week, the latest QV House Price Index showed prices in the Super City had flat-lined over the past three months, with 0.2 per cent growth, with suburbs in the north, south and west showing a dip in prices.

Homes.co.nz spokesman Jeremy O'Hanlon this week cautioned people not to take the trend as an assurance the market would continue to cool.

“February traditionally shows a spike in average sales price, so what happens this month will be our first real view as to how much the market has cooled in Auckland.”

The Reserve Bank will make its first policy review of the year today, with Governor Graeme Wheeler expected to keep the official cash rate at 1.75 per cent and retain a neutral bias for the benchmark rate’s future track. Joyce also announced his first budget would be on May 25, and that he wanted the Reserve Bank to do a full cost-benefit analysis of debt-toincome lending limits before adding it to its macro-prudential toolkit.

The Reserve Bank has sought Government approval to use debt-toincome (DTI) limits as a way of cooling the housing market.

If introduced, the restrictions would restrict what New Zealanders could borrow for a mortgage relative to their income. It is used in the United Kingdom, where buyers cannot get a mortgage higher than 4.5 times their annual earnings.

Treasury secretary Gabriel Makhlouf told the committee house prices had come off, especially in Auckland, as the loan-to-value ratio lending limits and tax changes had started to bite. Because lenders largely raised their money offshore, rising US interest rates had increased the cost of their funding, and even if the Reserve Bank keeps the OCR on hold, mortgage rates will rise, Makhlouf said.

As inflation headed back towards the 2 per cent mid-point of the RBNZ’s 1-to-3 per cent target band, Makhlouf said he would expect the OCR should move up, and that the market was already pricing in a 60 per cent chance of a hike this year.

Once people have something for a while, whether it’s low oil prices, high oil prices, or low interest rates, they seem to assume it will last forever, but it doesn’t. — Steven Joyce, Finance Minister