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The strength of the housing market has caught the Reserve Bank “completely off guard” and its decision to consider re-enforcing loan-to-value restrictions is not surprising, says one economist.
Photo: RNZ / Nate McKinnon
“As recently as the August monetary policy statement, they were forecasting negative house price inflation of 7 percent for the year ending December 2020,” said Westpac chief economist Dominick Stephens.
“The most recent data clearly shows that we will get something else like 9 positive, so they have had a 16 percentage point surprise … and they are struggling to catch up,” Stephens said.
“They have recently been faced with a conundrum. They have had to cut interest rates to prevent inflation from falling, but that has caused a house price boom and rising prices are causing widespread concern in society And it’s also a threat to financial stability. “
Stephens said RBNZ made the point, however the counterfactual would have been worse.
“If they hadn’t lowered interest rates in recent years, New Zealand could have slipped into deflation, which is absolutely terrible and would produce worse social outcomes than rising house prices.”
RBNZ had two issues at stake, he said.
“First, if house prices really do escape, that could pose a risk to financial stability because it increases the possibility of a subsequent sharp decline.
“But secondly, the fact that they have lowered interest rates in the last six months and clearly caused a large increase in house prices, is a threat to their political and social license to operate monetary policy in pursuing inflation and employment targets.
“Basically, people are starting to question the value of the Reserve Bank’s monetary policy if every time interest rates go down it tends to create this increase in house prices. So I think that in addition to doing something on the problem, the Reserve Bank also has to be seen as sensitive to the impact of its actions on house prices. “
Stephens said breaking the commitment to keep LVRs off for a year, which RBNZ said it would do when it phased them out in May, was “drastic.”
“They are breaking a commitment and I think that calls into question the other commitments they have made.”
“They made a big commitment to keep OCR [official cash rate] unchanged until March 16, but if LVR’s engagement can be broken, maybe OCR’s can as well. “
He said any new restrictions would be aimed directly at investors, not early home buyers, and that the current situation shows that low interest rates, not housing supply, is the main driver of the booming market.
“Over the past three decades, the biggest contributor to the rise in house prices in New Zealand has been a dramatic change in interest rates and I think what is happening now is proof of that.
“So we have very, very low net migration, we have a booming construction sector but house prices are booming … it is clear that the reduction in interest rates has been much more important since beginning.
“New Zealanders like to imagine that New Zealand-specific factors are driving our home prices, like the housing supply here or municipal restrictions there, but the fact is that around the world a big drop in interest rates it has caused a huge surge in asset prices of all kinds, including housing markets in many cities and equity prices around the world. “
