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Despite funneling billions of dollars into the economy in an attempt to bring the cost of borrowing to record lows, the Reserve Bank is not responsible for New Zealand’s housing problems.
RBNZ Governor Adrian Orr would also appreciate the media writing as much about New Zealand’s strong track record in keeping employment levels high as we do about the housing crisis.
His comments came as the RBNZ announced that it would launch our new scheme for retail banks, giving them access to cheap financing, which they could pass on in the form of even cheaper loans to homes and businesses.
The scheme could end up granting roughly $ 28 billion worth of funds to banks, and as the Reserve Bank chose not to target the scheme, most observers believe the money will end up flowing directly to the housing market. .
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Home prices continue to rise despite concerns about the broader economy.
To soften the advantage and with a view to ensuring the stability of the financial system, the RBNZ also said it would consult on the recovery of restrictions on subprime loans in the form of repayment of loan-to-value restrictions (LVR). which were withdrawn in April, for a period of 12 months.
The Bank now says they could return in March.
Speaking after the announcement, Orr expressed frustration at being blamed for higher house prices, especially since the Reserve Bank has no direct responsibility for ensuring that house prices do not inflate out of control.
When it comes to employment, Orr was annoyed by the focus on house prices.
“Everything I read about monetary policy is about house prices, but that is not our mandate and I would ask journalists to reflect on that,” he said.
“My colleagues talked about the fact that there are something like three house price indices that come out monthly, which means nine-to-one reports on house prices versus unemployment, which is fascinating for the clips. of newspapers and clickbait, but it is not in our mandate. ”
KITCHEN / ROBERT THINGS
Reserve Bank Governor Adrian Orr Says High House Prices Are Not His Fault
Observers note that Orr is right.
Infometrics economist Brad Olsen said the Bank put itself in a difficult position where it had officially ignored the pain in the housing market.
“The Reserve Bank is caught between a rock and a hard place because it does not have a mandate and therefore it is explicitly blind to asset price increases when it comes to monetary policy,” Olsen said.
The Reserve Bank has a strict mandate to ensure that the price of things, as measured by the CPI, remains level, while keeping employment at its maximum sustainable level.
But the RBNZ uses rising house prices to achieve both goals, through the wealth effect. When house prices go up, people feel wealthy and are more inclined to spend. That spending drives growth, ideally creating inflation and jobs.
The Bank acknowledged this in its Monetary Policy Statement (MPS) on Wednesday, saying that “rising asset prices are also supporting household spending.”
“Household wealth has historically been a driver of household spending.”
High house prices are not the bank’s goal, but they are a useful tool and the bank is very interested in continuing to use it. Funding for Lending (FLP) could invest $ 28 billion in banks.
Ideally, some of those loans will go to businesses looking to grow, but the Reserve Bank’s decision to leave it completely untargeted means that every last penny could end up in the housing market. Westpac economists expect home prices to rise as much as 15 percent next year.
A note from ANZ chief economist Sharon Zollner said the scheme would have a bigger impact on housing than business loans, mainly because businesses were simply too insecure to borrow at the moment.
“[Firms] they are cautious about investing until the economic outlook is clearer, ”he wrote in a note.
Kiwibank chief economist Jarrod Kerr hoped for some goal, or at least a system by which banks would be encouraged to lend more to businesses, rather than homeowners.
He suggested that one scheme was for every dollar banks loaned to businesses and received $ 5 of cheap financing in return.
“It really encourages the money to go into business loans,” he said.
But arguments about the ineffectiveness of targeting seem to have prevailed.
Maarten Holl / Things
There has been a growing move, sparked by comments from ACT leader David Seymour, for the bank to look at high house prices more directly.
The Bank is much more interested in talking about the issue of housing supply. On Wednesday, Orr pointed to a 2012 Productivity Commission report on Housing in New Zealand that spoke of regulation and construction costs as drivers of high house prices in New Zealand, rather than interest rates.
“Interest rates were not mentioned,” Orr said.
“There are many other factors that we all talk about and none of them are here at the Reserve Bank.”
The Reserve Bank’s printed Monetary Policy Statement only quoted the executive summary, which did not mention monetary policy or interest rates. In fact, the full report makes extensive comments on how low interest rates “fueled both the appetite for loans and investors ‘quest’ for yield,” which “created upward pressure on house prices,” especially if the housing supply was slow to respond. ” .
Orr later clarified that the interest rate “will certainly alter asset prices among many other things that will alter asset prices.”
There has been a growing move, sparked by comments from ACT leader David Seymour, for the bank to consider high house prices more directly when making monetary policy considerations.
National’s new treasurer, Andrew Bayly, said National was not interested and said it would give the bank too many targets to hit, which could be problematic if it had to choose between them, for example sacrificing its inflation target to affect its House. target price.
KITCHEN / ROBERT THINGS
The National Party is unwilling to make house prices a target for the Reserve Bank.
Orr said he would not comment on such a proposal, but Lieutenant Governor Geoff Bascand said the issue could come up in the bank’s five-year review.
“We are required to have a competency review every five years to be the advice of the Reserve Bank and the Treasury and ultimately the Minister’s decision on how our objectives should be specified and that kind of issue will be considered in that moment, whether it’s appropriate, ”he said.
“You always have these discussions about the CPI and what it measures and is the correct target for inflation and I think that in the coming years there are opportunities to research and reflect on that.”
Bur Orr splashed water on the suggestion that the bank could use this review to seriously consider curbing runaway home price inflation, noting that similar ideas had been rejected abroad.
One area where the bank might be concerned about home prices is their effect on overall financial stability, especially if home buyers can no longer afford mortgages.
“It is not house price inflation, it is the number, level and proportion of subprime loans that concerns us,” he said.
“High-risk loans are those where you are highly leveraged and you may have a small change in your employment situation, your family income situation, the interest rate of the price you are paying and suddenly you cannot afford it.
“That could happen if unemployment increases and occurs in a wide swath of households that are highly leveraged.”
