The housing market maintained its strong upward trend in February, helped by improving household incomes, low mortgage rates, and constrained supply. House price inflation remains relatively modest, and dominated by Auckland and Canterbury (the two regions with the most obvious supply constraints), but is still on track for our forecast of an overall 3.5% increase this year.

The pickup in housing turnover in itself is unlikely to rattle the Reserve Bank, which incorporated a stronger housing market in the March Monetary Policy Statement. Our concern is that the RBNZ may be underestimating the inflationary consequences of a housing recovery.

Nationwide house sales rose 6.2% in February after a broadly flat month in January. Auckland, Waikato and Canterbury continued to trend higher, each region racking up around a 4% monthly rise in sales. There were also sharp gains in some of the smaller regions - Taranaki, Marlborough and Southland - albeit following unusually weak sales in January. The average time to sell shortened by nearly two days to around 38 days, the lowest since March 2010.

The stratified price index eased by 0.3% for the month, and the annual gain slowed from 4.3% to 2.7%. Price gains remain largely concentrated in Auckland (up 8.7%yr, the fastest pace in two years) and Canterbury (up 7.1%yr). Section prices nationwide have also been heating up, rising 5.9% in the past year.