Reserve Bank’s Adrian Orr on Grant Robertson’s House Price Suggestion

The Reserve Bank has thanked, but not thanks, to the specific suggestion of Finance Minister Grant Robertson on how the central bank could play a more active role in cooling house prices.

Instead, he told Robertson that if the government wants to address New Zealand’s housing problems, it needs to create a new housing agency.

“There is a need for a single agency or ‘clearing house’ to coordinate the government response between agencies,” Orr said.

He has also requested that the government grant more powers to the Reserve Bank to prevent those with high levels of debt from buying more assets, such as more houses.

This includes making debt-to-income limits a permanent part of the Reserve Bank’s toolbox next year.

Orr released the Reserve Bank’s full response to Robertson’s Nov. 24 letter this morning, seeking Orr’s opinion on how the RBNZ could help “address the issue of rising house prices.”

It’s a very detailed answer, but Orr told Robertson that the government already has the tools it needs to stabilize the housing market.

“Solutions to any identified high house price or home affordability problems require the involvement of many government agencies and portfolios, as well as non-government stakeholders.”

In fact, he said that the Reserve Bank was just one of the top 17 players when it comes to the New Zealand property market.

“Government agencies already have a wide range of levers that could be used to address housing problems.”

One of those measures includes “fiscal policy,” but Orr does not spell out what changes need to be made.

Responding to Orr’s letter, Robertson said in a statement: “I thank the Governor for his response and will consider it, along with the advice I have requested from the Treasury. The Government will make announcements in the New Year.”

Although Orr returned some of the responsibility for New Zealand’s housing problems to the government, Orr suggests one way the Reserve Bank could help.

But he rejects an option that Robertson had lightly discussed in his letter last month.

Robertson said one option was to change the mandate of the Reserve Bank so that the bank would take house prices into account when formulating monetary policy, such as setting interest rates.

But Orr cautioned against this option, saying there are “strong reasons” why it wouldn’t work and there could be a number of adverse tradeoffs.

These, according to the letter, could include less employment, specifically for Maori, Pasifika, women and youth, as well as reducing the supply of housing.

“There are strong reasons why it is unlikely to result in significant policy changes.”

But Orr has outlined what he describes as his “preferred option” as to how the Reserve Bank might get involved when it comes to cooling the housing market.

He said a new “home price consideration” could be added to one of his current responsibilities: his “financial stability” obligations.

This would mean that the government could specifically direct the bank with respect to a specific government policy.

This would allow a comprehensive Reserve Bank response to housing market problems and would mean that the Reserve Bank could target “specific drivers” of the housing market, Orr said.

“If you want to strengthen the role of the Reserve Bank in relation to house prices, our recommendation is that this would be best achieved by modifying our financial policy mandate.”