Indigestion is likely to be the order of the day in Government and Reserve Bank circles in the face of further strong house market figures

By David Hargreaves

There will be some fingers, toes, and possibly a few other things, crossed in offices both of the Government and the Reserve Bank today.

The release of further incendiary housing figures both in terms of supply and what's happening with sales give extra added oomph, if it was needed to the Government's decision to impose new tax rules for property investors from today and for the RBNZ's new measures aimed at Auckland property investors starting next month.

And you could well imagine a few "this had better work" comments both in the Beehive and the nearby RBNZ HQ.

There remain two ways of looking at the very strong recent housing data, backed up by equally strong credit figures.

Either what we are seeing at the moment is investors clambering in ahead of the two-year-sale tax rule and the 70% LVR mortgage limit (the latter just for Auckland investors).

Or we are looking at a house market that is going to carry on charging upward regardless, thank you very much.

What the RBNZ and the Government will be hoping is that we are currently seeing data that represents the lag between when house transactions are entered into and when everything goes through, such as mortgage agreements.

Anecdotally the Auckland auction scene is much quieter just recently. And today's QV release suggests things are slowing. The figures from this month onward are likely to tell the tale.

But for me the most interesting emerging pattern has been the spread of activity beyond Auckland and into other markets.

That's significant because the RBNZ will from November 1 be relaxing the "speed limit" on high loan to value lending outside of Auckland.

Within Auckland banks will have to stick to no more than 10% of their new lending on high LVR loans. But outside of Auckland that's being relaxed to 15% and the RBNZ has indicated that this relaxation is the first step in perhaps removing the LVR limits altogether in the non-Auckland parts of the country. You would imagine therefore that the trend for people to look outside of Auckland will only increase - and with that more upward pressure on prices.

However, the RBNZ's Deputy Governor Grant Spencer in a speech in late August noted the emergence of house price pressures outside of Auckland and suggested that if this continued there may be a delay in removing LVRs from the rest of the country.

I think from what we are seeing already there is sufficient evidence to suggest that whatever happens in Auckland from now, the rest of the country (and particularly regions adjacent to Auckland) are going to continue seeing a pick up in activity that will be, I think, sufficient to kill off any thoughts of the RBNZ removing the LVR limits. Indeed I wouldn't be surprised at all to see, at some point, the central bank move to drop that speed limit for the rest of the country back down to 10% again.

As I've said before, I believe we are now stuck with the LVR limits for the duration.

It will be interesting to see how far the RBNZ will let the house prices go in the rest of the country before deciding to clamp down on the LVRs again. Most people not living in Auckland would surely welcome some period of catch-up with the runaway biggest city.

As for if the measures already teed up for Auckland don't show immediate signs of reining things in, it will be very interesting indeed to see if the Government and the Reserve Bank have either individually or collectively a Plan B.