The Reserve Bank predicts house prices could begin to drop as early as next year, and by about five per cent by 2024 as a “very modest” estimate.
But, Reserve Bank Governor Arian Orr noted on Breakfast the magnitude and timing of such a drop was highly uncertain.
What was more certain, though, was that the market was due for a correction, and that the increase on house prices seen recently were unsustainable, Orr said.
As people continued to “pile into” assets, like houses, that were “overvalued”, Orr warned there was “a risk on our hands”.
“We are concerned about financial stability,” he said of the Reserve Bank’s position.
When asked whether he felt pressure from the Government to help control runaway house prices, Orr emphasised it wasn’t directly part of the central bank’s remit.
“We stay focused on our purpose, and our purpose is the inflation and employment outlook…inflation pressures are rising globally, as well as here in New Zealand.
“Globally, the commodity prices, the supply chain…domestically as well because we have capacity constraints [labour shortages and supply shortages].”
However, he acknowledged house prices played a role in consumer confidence, construction activity and the cost of living.
“So, it is embedded in the way we think about it. The stronger house prices, the stronger the economy, in general.
“So, we do have a vested interest in making sure that house price growth is sustainable and not overshooting.”
Despite the role cheap borrowing played in the state of the property market, the central bank announced on Wednesday it was holding the official cash rate at the record low 0.25 per cent.
That announcement came after the country’s move to Alert Level 4. Before the shift in alert levels, most economists and banks were expecting the OCR to go up.
On Thursday morning, Orr was adamant the stimulatory rate wouldn’t be around forever.
He said the “easiest navigation star” to look ahead to was a return to a “neutral” OCR of 2 per cent.
The fact that OCR was expected to increase before the alert level announcement on Tuesday showed “the economy could manage very strongly without as much monetary stimulus”, he said.
But, with the latest lockdown, Orr said the bank would continue stimulating the economy with a low OCR rate in the short term.
“The virus will do what it does, and we need to respond accordingly,” he said.
Annual consumer price index inflation — the rising cost of living based on the price of a representative basket of goods and services — is at 3.3 per cent.
The Reserve Bank expected inflation to temporarily increase in the near term, and return to the midpoint of the 1 to 3 per cent target band over the next three years.
Unemployment is also at a low, sitting at about 4 per cent.
The Reserve Bank released its Monetary Policy Statement for August 2021 on Wednesday.