The Auckland housing market is in dangerous territory, Reserve Bank Governor Graeme Wheeler says.
The central bank today reduced the key interest rate from 3 percent to 2.75 percent, citing slowing domestic activity due to lower dairy prices, the plateauing of construction activity in Canterbury and weaker confidence.
Within minutes of the decision, two of the major retail banks announced cuts to floating mortgage rates, and the dollar soon fell more than one cent.
Kiwibank reduced its floating rates from 6.15 percent to 5.9 percent effective immediately for new customers. ANZ announced a quarter percentage point cut in its floating rate to 5.99 percent, and to 6.10 percent for flexible home loans, effective on Monday for new customers.
The move - and the signal a further cut is likely - prompted Prime Minister John Key to predict mortgage rates "with a 3 in front of them" while maintaining it would not fuel the Auckland housing market.
But Mr Wheeler this afternoon told MPs the faster house prices rose in Auckland, the greater the likelihood of a steep price reversal.
He said Auckland house prices were not sustainable.
"The house price to income ratio for Auckland is at nine. It's twice that for the rest of the country," he said.
"A ratio of nine puts you, according to Demographia figures, in the top 10 most expensive cities in the world.
"This is just dangerous territory."
Investors accounted for 33 percent of transactions in Auckland two years ago but that had risen to 41 percent, Mr Wheeler said.
Steven Joyce, speaking on behalf of Finance Minister Bill English in Parliament this afternoon, said people should pay attention to the warning.
"It is important for people to understand, if they're buying houses that actually you can pay too much for a house," Mr Joyce said.
"And there are risks because although interest rates are very low at the moment they don't stay low for ever and people generally stay paying off their houses for a very long time."
Mr Key had earlier said he did not believe today's cut would fuel the Auckland housing market.
Labour Party finance spokesperson Grant Robertson said New Zealanders should be concerned.
"We have now got in Auckland, one of the most unaffordable housing markets in the world, we've got a house price to income ratio of nine to one," Mr Robertson said.
"Young New Zealanders are being priced out of the housing market in Auckland, but its also now seeping into other parts of the country as well."
Today's move was the Reserve Bank's third consecutive cut to the OCR.
Mr Wheeler said economic growth had slowed to about 2 percent, due to lower dairy prices, a slowdown in construction activity in Canterbury and lower confidence levels.
But he said he did not expect the economy to fall into recession, as growth was underpinned by robust tourism, strong immigration and the large pipeline of construction activity in Auckland, and assisted by a falling dollar and lower interest rates.
Mr Wheeler said another cut was likely in the near term, which would return the OCR to its record low of 2.5 percent - the level it was last at in January 2014.
"These are always highly conditional forecasts," he said.
"They're based on a large number of assumptions, including migration flows and what we think might happen to dairy prices and the like.
"But we've indicated that we think another 25 basis points cut might be appropriate."
Mr Wheeler said inflation was likely to rise to about the middle of the Reserve Bank's target band of 1-3 percent in the second half of 2016, due to the lower dollar making imports more expensive.
PM welcomes cut
Mr Key said he expected people would welcome the cut, and that Mr Wheeler was generally upbeat about the New Zealand economy.
"The Reserve Bank Governor does have options, so he's in a better position than a lot of other countries - we've had higher interest rates.
"So the cut that he made today will be welcomed by people. Fundamentally, there's every chance you can see mortgage rates with a 3 in front of them at some point."
Employers and Manufacturers' Association chief executive Kim Campbell said cutting the OCR was the right move in the current economic climate.
"That will telegraph through to jobs and so forth. Also, it sets us up for a tremendously strong tourist season," he said.
"We're already having record numbers but that'll be even more so.
Mr Campbell said it would also give under-pressure dairy farmers some relief.