Wheeler warns banks on house price inflation 05 February 2015 4:02PM Bernard Hickey Reserve Bank of New Zealand Governor Graeme Wheeler has warned banks he is watching how they're contributing to resurgent inflation in Auckland's over-valued housing market, but has stopped short of saying what he might do about it.Wheeler used his first set-piece speech of 2015 to say he was concerned about house price inflation because of the risks it posed to financial stability and the broader economy.Wheeler stopped short of suggesting he might use or create new 'macro-prudential' tools to slow lending into the housing market, but said the bank would talk more about the housing market over the next few months.Bank economists had previewed the speech with suggestions that Wheeler could raise the possibility of new macro-prudential tools as a way for the bank to slow the housing market without having to put up interest rates, or at least slow house price inflation in the event the bank has to cut interest rates.Wheeler highlighted the bank's conundrum in the speech, detailing how the economy's strong growth was happening at the same time as a slide in headline inflation to below the bank's one to three per cent target band because of the strong New Zealand dollar and a slump in oil prices.Speculation he could also preview a possible rate cut in March had intensified since the Reserve Bank of Australia's surprise cut on Tuesday, and Glenn Stevens's warning that the RBA was "working with other regulators" to assess the economic risks from the housing market.Wheeler poured cold water on financial market calls for rate hikes, saying the bank favoured interest rate stability for now.He spoke at length about a resurgence in house price inflation in Auckland in particular, where record high net migration, falling fixed mortgage rates and strong employment growth had pushed the rate of home price increases back over ten per cent again. The bank's high LVR speed limit imposed in late 2013 had slowed Auckland's house price inflation back into single digits, but it has worn off since late 2014.Wheeler said much more needed to be done to resolve housing supply shortages in Auckland and he pointed to IMF research showing New Zealand housing valuations were the second highest in the world behind Norway."We will continue to monitor housing developments carefully, and the role that the banking system may be playing in contributing to pricing pressures in the housing market," he added.He said house price inflation could spill over into faster spending and pressure on consumer price inflation."And the more that house prices get out of line with historic relativities, the greater the risk of a sharp correction, leading to financial instability," he said.