Grant Robertson moved in today to ‘reset the clock’ on the dwelling. Can work

The government has admitted that high house prices are increasing inequality and poverty, and the finance minister wants the Reserve Bank to do something about it. Justin Giovannetti writes from Parliament.

There has been an invisible wall in the center of Bowen Street in Wellington for a generation. On one side are the parliament and elected officials, on the other are the guardians of the country’s economy, the independent Reserve Bank of New Zealand.

Today, the first signs of a new crack appeared in that wall. In recent months, the two sides of Bowen Street have been increasingly at odds over house prices. Finance Minister Grant Robertson is now looking to align the central bank by changing the way it sets monetary policy.

At the heart of this are two institutions that do what they are supposed to do. The Reserve Bank has been doing its job since Covid-19 hit. Its mandate is to keep the economy growing and curb unemployment. Independence is supposed to insulate him from some of the repercussions of that mandate. Social problems, such as the increase in inequality, are a problem for the parliament opposite.

New Zealand’s economy has fared better than expected, despite a global pandemic. Much of that can be attributed to a Reserve Bank that addressed the problem immediately. It slashed the cash rate to 0.25% from 1% in March. That makes it much cheaper to borrow money. But that was not enough as Covid stopped the global economy.

The Reserve Bank then announced its intention to flood the country with up to $ 128 billion in new money during the next term in office. That torrent of money, which has already started, has reduced borrowing costs to almost zero. That means commercial banks, as well as many businesses, now have a lot of cash. Where does that money go? It has been hitting the housing market.

Anyone who has been to an open house in the last few months, or has been hit with a steep rent increase, knows what happened. The New Zealand Real Estate Institute says the median home price has skyrocketed 16.4% over the past year.

For the Reserve Bank, that is not a problem to worry about. “Complaining” about house prices is a “first-class problem,” the bank’s governor, Adrian Orr, said last week.

Reserve Bank of New Zealand Governor Adrian Orr (Photo: Getty Images)

Rising home prices in general is a good thing for the Reserve Bank. It means that people with investments and households are richer in paper, so they are more likely to spend freely and with confidence. More spending is good for the economy. As home prices rise, they can borrow more and spend more.

While the complaints may not have moved Orr, they have moved Robertson and the government. With his legislative agenda at risk of being overwhelmed by a growing housing crisis, Robertson announced today that the government is realigning its housing agenda. The first step: move forward to tell the Reserve Bank to stop pumping money into the economy and make the situation worse. House prices are now an Orr problem too.

“What we are concerned about is the rapid rise in house prices, we have already seen banks projecting price increases of 15 to 20% next year,” said Robertson. “Today is the day we say we want to reset the clock.”

The problem, according to Robertson, is that home prices now threaten the long-term financial health of the country by creating more inequality and poverty. Homeless and uninvested people will become poorer, facing higher barriers to buying a home and higher rents as homeowners seek to recoup their investments.

In practical terms, the government is asking the Reserve Bank to start a conversation about changing a few words in its mandate. The existing mandate of the Reserve Bank to boost the economy and reduce unemployment would be maintained.

There are already some minor issues that the bank’s Monetary Policy Committee must consider when making decisions. In addition to ensuring that the financial system remains sound, the bank should try to keep prices, interest rates and the value of the New Zealand dollar stable. House prices would now be added to that list.

The Reserve Bank can, technically speaking, say no to change. In a letter this afternoon, the Governor of the Reserve Bank, Adrian Orr, responded without a hint of submission to the minister’s request. He said the Reserve Bank would “consider” Robertson’s letter and “respond with thoughtful comments in due course.” Orr later added that the bank already considers house prices when making decisions, so the change wouldn’t amount to much anyway.

As recently as last week, Jacinda Ardern said she did not want to interfere with the Reserve Bank and warned that previous governments had learned “hard lessons” from messing with the central bank. He was referring to Robert Muldoon’s time at the helm.

However, the bipartisan consensus that Reserve Bank independence is sacrosanct has been eroding in recent weeks. National had been asking the government to stop him. The apprehension about giving instructions to the bank has disappeared as the scale of the housing crisis has become clearer. Each month brings ever higher prices, challenging economists who expected a collapse.

One of Ardern’s “concerns” voiced in recent days is for first-time buyers. New Zealand, he said, should not be a country where home buying is limited to young people with parents who have pockets large enough to cover their deposit. It may already be too late. Any first-time buyer who has recently applied for a mortgage would know that this is the polite question from a bank of whether or not a “donation” is expected from the family.

The government’s plan is not to lower house prices, but simply to limit increases to something more manageable. “A period of sustained restraint,” Robertson said.

Existing programs to support first-time buyers have been inadequate, Robertson said today. In most cities, government programs don’t come close to providing the help someone would need to buy a home.

PM Jacinda Ardern and Rep. Grant Robertson (Getty Images)

Ardern, and Robertson again today, have repeatedly ruled out a capital gains tax, in any form. Greens co-leader Marama Davidson had suggested a capital gains tax on the sly, via existing taxes, but the prime minister crushed it.

As part of the housing restart, the government will study what it can do to increase supply. By some estimates, the country needs 100,000 more homes, but expansion of construction is limited by a shortage of builders. Some city councils have also been reluctant to approve large-scale projects due to the costs of building roads, pipelines, emergency services, and other associated costs.

The government will also seek to reduce demand. Robertson said that could include increasing the amount of time someone takes to keep a home before it can be sold, or facing a so-called bright line tax.

One thing that is unlikely to emerge from today’s reboot is a move by Beehive to massively increase spending. Robertson avoided any suggestion that he is willing to spend more. Most of the problems cannot be cleared through Bowen Street. The Reserve Bank cannot do much for people on the top of poverty. He deals with economics in abstractions, playing with interest rates and other accounting movements.

Where rising house prices make poverty worse, parliament can help. However, the Ardern government has ruled out an increase in benefits for the poorest in society, saying that we cannot afford it. That happened when the Reserve Bank gave home and business owners billions of dollars, because they said they couldn’t afford not to. That is the gap that Robertson now seeks to bridge.

Parliament’s reluctance to spend is near the center of the real estate crisis. Robertson began his presentation today by talking about how the government has exceeded its projections according to the final economic accounts for the last fiscal year. Revenues are up, expenses are down, and the deficit is lower than expected. However, that relatively optimistic situation has not translated into spending to help those who have not benefited from the Reserve Bank’s monetary tsunami. It is not yet clear what the government intends to do for them.