simply consider supply and demand factors when measuring sustainability, this would mean that prices could continue to rise and yet be considered sustainable. “Under that approach house prices could move a lot higher and still be considered sustainable,” the minister said.
Orr pushed back to this response, alleging that Swarbrick had misinterpreted his views, and went on to clarify what sustainable house prices meant to the Bank. It is “where the choice between owning a home and renting a home is a balanced choice and the choice between investing in housing and all other assets is a balanced choice based on expected risk-adjusted returns”.
As questions moved from Swarbrick to other members, MP Nicola Willis inquired how the Reserve Bank was confident that the growth in house prices would come to a standstill, particularly given the fact that prices had done nothing but increase over the recent months.
Orr noted that while prices of assets are by definition, “notoriously difficult to forecast”, however, the bank looked through short term fluctuations in house prices in order to determine medium and long term fair value of housing. Accordingly, it was concluded that long term fair value of housing were to the downside, which meant that there is a lower chance of an out-of-control increases in prices.
The meeting concluded with a warning from the Governor that the low interest rates that have been propped up by the Bank would not last forever, which means highly indebted homeowners are facing a huge risk.
“We are comfortable that banks can absorb the risks sitting out there,” Orr said. “We are less comfortable that all households are cognisant of the leverage they have at present and the ability of being in or out of work. What is their ability to manage that?”
