Housing market remains risk to New Zealand economy: Reserve Bank chief

The head of New Zealand's central bank on Monday reiterated his concern about the risks of soaring house prices on the country's financial stability.

Reserve Bank of New Zealand governor Graeme Wheeler said an increase in housing supply was needed to address a "housing imbalance" in the country's biggest city of Auckland, home to a third of the population.

The central bank and the government had taken measures to dampen investor demand and to lower the financial and economic risks of the city's overheated housing market, Wheeler said in his statement in the bank's Annual Report 2014-2015.

However, headline and underlying inflation have been lower than what the central bank would have preferred.

Since the December quarter of 2014, annual Consumer Price Index inflation has been below the bank's target band of 1 percent to 3 percent, primarily due to the 52 percent decline in oil prices since June 2014, and the continued strength of the New Zealand dollar for much of the year.

Meanwhile, global prices for dairy, New Zealand's single biggest export commodity, had fallen 65 percent from February 2014 to last month, dragging down the country's terms of trade, which had been at a 40-year high in June 2014.

The bank began cutting its official cash rate from 3.5 percent in June to counter low inflation and to pull the exchange rate down -- but with reservations, said Wheeler.

"We are conscious of the impact that low interest rates and aggressive lending competition among banks can have on housing demand and its potential to feed into house price inflation," he said.

"We remain concerned about the financial stability risks and risks to the broader economy that would be associated with a major correction in Auckland house prices."

However, the New Zealand economy had performed much better than many advanced economies in recent years.

"GDP growth for the year to March 2015 was 2.6 percent, and employment increased by 3 percent with labor force participation at historically high levels," said Wheeler.

International forces had had a major influence on the economy.

"We experienced large declines in commodity prices, net immigration reached record levels, our long-term interest rates declined to low levels, and strong capital inflows meant that our exchange rate has been overvalued relative to long-term economic fundamentals." Endi