Reserve Bank will focus “a lot more on housing” in upcoming report

by Ksenia Stepanova04 May 2021

ASB economists expect the Reserve Bank’s Financial Stability Report for May to have “a lot more focus on housing,” as the property market has “heated up considerably” since the last report six months ago.

The next Financial Stability Report is expected on May 05, and senior economist Mark Smith said that housing will likely be seen as a “higher risk” compared to last year, given the rapid house price growth since November of last year.

He said the Reserve Bank has also been working on other macro-prudential tools to limit mortgage lending, though he said it is unlikely that we will get any solid information in the May report.

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“The Reserve Bank has long expressed a desire to use a debt-to-income (DTI) ratio tool to limit mortgage lending, and is also investigating restrictions on interest-only mortgages for property investment,” Smith said.

“However, the FSR will be too soon to announce any concrete progress on these measures, let alone any implementation.”

“Housing was already becoming a hot potato at the time of last November’s FSR, and, since then, the housing market has heated up considerably more,” he continued.

“Loan to value ratio (LVR) restrictions on mortgage lending are back in place, and the government has announced policy measures intended to discourage property investment purchases.

“Housing is likely to be seen as a higher risk given the strong price growth over the past six months, and the government’s recent policy decisions are likely to cool further house price gains.”

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Smith said that the Reserve Bank will “remain watchful,” despite other areas of the economy showing good resilience.

When it comes to the Official Cash Rate (OCR), he said the Reserve Bank will likely start raising it from August 2022, with it reaching 1.25% in March 2024.

“Market expectations have an OCR hike fully priced in by early 2023, which looks reasonable in light of the risk profile,” Smith said.

“We expect the Reserve Bank to continue to trim its Large Scale Asset Purchase (LSAP) programme, and to halt purchases from 2022, prior to raising the OCR from August 2022.”

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