RBNZ Orr: Global Rates Bigger Driver Of High NZ House Prices, Not OCR

By Sophia Rodrigues

(Sydney, November 2, 2021)—The secular decline in global interest rates has played a bigger part in rise in New Zealand house prices, rather than the official cash rate, Reserve Bank of New Zealand Governor Adrian Orr said Tuesday.

In an online speech to the Property Council of New Zealand Retail Conference, Orr downplayed the role of OCR in driving house prices higher. Rather, the rise has been driven by scarce supply and strong demand, but this is now reversing, he said.

“Movements in interest rates do affect the demand -- and ultimately the price -- of housing assets. However, it is mostly the long-term trend in interest rates, as opposed to short-term changes in rates related to monetary policy,” Orr said.

“Our recent research efforts suggest that it is the secular decline in global interest rates that most explains house price moves globally, with Official Cash Rate (OCR) surprises playing only a ‘bit part’,” he added.

Orr explained the RBNZ monetary policy with respect to housing prices, saying its mandate is not to use interest rates to target prices but to manage overall consumer price inflation stability.

“Trying to target both consumer prices and house prices with monetary policy will quickly lead to confusion and suboptimal outcomes,” he said.

What the RBNZ is required to do is consider the impact of its action on the government’s policy of supporting more sustainable house prices.

“It considers the outlook for the housing market because house prices can influence broader economic activity, employment, and consumer price inflation,” Orr said.

Orr expects an easing in house prices over the medium term as house-building is at record levels at a time when population growth is statics. This would push house prices towards a more sustainable level.

--Contact: Sophia@centralbankintel.com