RB nervous about house price falling

THE Reserve Bank is worried about the risk of a sharp fall in house prices, which are well out of line with household incomes.

In a speech in Christchurch yesterday, bank governor Graeme Wheeler also said the official cash rate would stay on hold ‘‘for some time’’, though it could be cut if drought hit the economy or times got tougher overseas.

‘‘A period of OCR stability is the most prudent option,’’ Wheeler said.

While pointing out the risk that could see the rate cut, he also said that the unemployment rate was low and falling, migration was at record levels and more people were moving into the workforce than ever.

In yesterday’s speech, Wheeler said New Zealand’s economic prospects were good, but the risks ahead were ‘‘more complex’’, with the country vulnerable to a big slowdown in China.

The central bank was concerned about house-price inflation because of the risk it poses to the stability of the banking system and the economy.

And the more that house prices got out of line with historic ‘‘relativities’’ with incomes, the greater the risk of a sharp correction, Wheeler said.

An IMF report in 2013 showed that New Zealand and Norway had the greatest deviation in house price to income ratios from historic trends among several advanced economies, at more than 60 per cent above the normal ratio.

The Auckland and Christchurch markets accounted for about half of the national market.

Prices in Auckland were up 39 per cent from 2007 levels, and Christchurch prices were up 27 per cent.

Annual house-price inflation, on a three-month moving average, is now 10.9 per cent in Auckland and 7.4 per cent in Christchurch.

For the rest of the country, prices were up just 1.1 per cent.