Hunt for yield driving property investors to regions, Reserve Bank Governor says

Wednesday 11th May 2016

Higher rental yields could be enticing property investors out of Auckland, Reserve Bank Governor Graeme Wheeler said, although he would not be drawn over whether the central bank will act to slow the surge in house prices across the country.

Wheeler made the comments at a select committee after the release of the bank's six-monthly financial stability report, which highlighted concern about the resumption of unsustainably high house price inflation nationwide, and especially in Auckland. The report stopped short of imposing new lending restrictions and the governors used a press conference earlier to flesh out their thinking on possible additions to the country's growing array of macro-prudential controls.

Wheeler was asked about the 'halo effect' of investors moving from Auckland, where the central bank has imposed lending restrictions, to nearby regions. A release from the Real Estate Institute of New Zealand today said investors were increasingly looking to buy property outside Auckland, with four regions hitting new median house price highs in April. Wheeler said rental yield in Auckland was very low at around 2.8 percent.

"You sort of say, why do people invest for that sort of rental yield?" Wheeler said. "It's linked to expectations of capital gains, and it's one of the reasons why you'll see those investors moving to Hamilton or Tauranga and other places - the rental yield there is higher, and they would think the capital gains might be higher."

Investors, who account for 42 percent of house transactions in Auckland and 40 percent across the rest of the country, were spilling over to regions outside the biggest city and that was a "big factor behind house price increases," Wheeler said. "The investor activity that's come out of Auckland has built up pressure in other parts of the country."

Wheeler said house price-to-income ratios in Auckland were currently just over 9, compared to 5.3 in the rest of the country.

"The concern is that ratio could continue to increase, we've seen more momentum in the housing market in February and March," he said, adding that while the ratio outside Auckland was lower, it was concerning how quickly house prices were rising.

At the press conference earlier in the day, Wheeler and deputy governor Grant Spencer said new lending restrictions to prevent people borrowing too much relative to their income were on the cards, though they stressed there is no timetable for implementation of such a measure which would require agreement from Finance Minister Bill English for inclusion in the government's memorandum of understanding with the central bank.

At the select committee, Wheeler said the central bank had not decided whether it needed to take further action, nor what that further action would be.

"We're continuing to watch developments in the housing markets very carefully, we're currently discussing in-house [whether there are] strong grounds for further macro-prudential instruments, we would move in consultation to the government about the housing market," he said. "At this point, we haven't made any decisions."

BusinessDesk.co.nz

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