Reserve Bank warns of rising economic risks from New Zealand housing crisis

New Zealand's biggest city, Auckland, now has one of the world's most expensive housing markets, with property investors driving a growing risk to the country's economy and financial stability, the central bank warned Monday.

House prices in Auckland -- home to a quarter of New Zealand's population -- surged by 24 percent over the past year, compared with 3 percent for the rest of the country, Reserve Bank of New Zealand (RBNZ) deputy governor Grant Spencer said.

"This has stretched the price-to-income ratio for the Auckland region to nine, double the ratio for the rest of New Zealand, and places Auckland among the world's most expensive cities," Spencer said in a published speech in Auckland.

"New housing supply has been growing, but nowhere near fast enough to make a dent in the existing housing shortage. In the meantime, net migration is at record levels, and investors continue to expand their influence in the Auckland market."

Investors now accounted for 41 percent of Auckland house purchases, up 8 percentage points since late 2013.

"We have seen a particular increase in purchases by smaller investors and investors reliant on credit. Half of the new lending to investors is being written at loan-to-value ratios of over 70 percent," said Spencer.

"This trend is increasing the risk inherent in the Auckland market. The increasing investor presence is likely to amplify the housing cycle, and worsen the potential damage from a downturn, both to the financial system and the broader economy."

The RBNZ was aiming to avoid a sharp fall in house prices that might lead to banks tightening lending and economic contraction setting in.

In May, the RBNZ had modified its loan-to-value ration (LVR) policy for mortgage lending by commercial banks to specifically target Auckland residential investors, while easing restrictions in the rest of the country.

However, the RBNZ was unlikely to raise interest rates for some time due to the current weakness in export prices, economic activity and inflation.

Also on Monday, the government introduced a tax bill to Parliament that would require income tax paid on any gains from homes bought and sold within two years, excluding on an owner's main home, inherited property or relationship settlement transfers.

Revenue Minister Todd McClay said in a statement that the two- year "bright line" would make it clear that all property buyers, including overseas buyers, who bought and sold a residential property within two years, would be taxed on their gains.

The main opposition Labour Party said the RBNZ was having to " carry the can" for the government's failure to tackle the Auckland housing crisis.

Labour housing spokesperson Phil Twyford said in a statement that the government's Productivity Commission had predicted that Auckland's housing shortfall would rise from 32,000 now to 60,000 by 2020.