Bollard doesn't see price pressure in property

BUSINESSDESK: Reserve Bank Governor Alan Bollard isn’t seeing any evidence of undesirable pressure in property prices, but has a tool-kit handy if the threat of a housing boom rears its head.

Bollard told Parliament’s finance and expenditure committee the pick-up in construction activity and house sales has come from a low base, and property values are still about 13 percent below their 2007 peak in real-terms.

“We see what looks to be demographically driven rebuild and earthquake driven rebuild and those are both desirable things,” Bollard said. “We’re not expecting big price pressure. We don’t think New Zealanders are making those decisions based on capital gains either.”

Bollard was comfortable with his arsenal to stamp out another boom should one arise, telling the committee “were we to see what looked like a resurgence of the mid-00s in housing, we’d also be more inclined to pull out some macro-prudential tools.”

Those include requiring banks to hold more capital on their balance sheets, or even introduce short-term loan-to-value ratios, he said.

The central bank held the official cash rate at 2.5 percent today, and Bollard warned the strength of the kiwi dollar could threaten to keep a lid on interest rates as it hinders the tradeable sector and strips out imported inflation.

Bollard lowered the track of the 90-day bank bill rate, often seen as a proxy for the OCR, stripping out gradual increases this year. The bank sees the bill rate at 3.3 percent by the end of 2013, having previously forecast it to be 4 percent. At the same time he lowered the track of inflation, with the consumer price index now expected to be 1.4 percent in the third quarter, down from 2.3 percent in his previous forecast.

Westpac Banking chief economist Dominick Stephens said the Reserve Bank had a tough sell to the market in putting forward the case that the strong currency was underpinning a tepid inflation outlook because it may downplay the impact of rebuilding Christchurch, squeezing supply of everything from plumbers to roofing iron.

“We were expecting a dovish statement despite signs of a strengthening economy, and the Reserve Bank took that far further than I was expecting,” Stephens said. “Their forecast for inflation is a little bit on the light side in the short-run” given the looming stimulus for the reconstruction effort, he said.

That leaves the central bank in the same situation it was in 2003 when it tried to take the wind out of a surging currency in the face of an emerging housing boom. That resulted in the Reserve Bank hiking the OCR to a record high 8.25 percent in 2007, near the height of the boom.