The latter channel has created a strong link between house prices and the financial cycle. During the boom that link was accentuated with the emergence of widespread housing investment activity, bringing with it rapid credit growth, a high volume of offshore borrowing and upward pressure on the NZD exchange rate.
Consequently, housing can be highly relevant for the Reserve Bank’s Monetary and Financial Stability policies. Monetary policy responds to house price pressures when these are seen as a clear driver of inflationary pressure through stronger domestic demand. This can occur when wealth effects push consumption ahead of income growth and households borrow against housing capital gains.