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EXPLANATORToday, in a series of letters, Finance Minister Grant Robertson and Reserve Bank Governor Adrian Orr agreed to seek ways to improve housing affordability.
It doesn’t seem like much. It doesn’t sound like something that should carry newsletters and move the value of the New Zealand dollar, but it really is.
At the core is the question of whether it is time to acknowledge that a Reserve Bank crisis response of epic proportions has had an effect on house prices, entrenching inequality and frustrating the dreams of a generation of homebuyers. first home.
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What did the Reserve Bank do?
The Reserve Bank has two main jobs. One is called monetary policy; the other is to make sure the financial system is stable.
Monetary policy is the most important. Monetary policy is, in its simplest form, determining how much money is in the economy and how much it costs to borrow. If there’s too much cheap money, too much stimulus, you get runaway inflation, like we had in the 1970s.
The official monetary work of the Reserve Bank is quite simple: it has to monitor inflation, keeping it between 1 percent and 3 percent, and ideally around 2 percent in the long run. You also need to make sure there is enough employment.
How do you do this?
It usually does this through the official cash rate or OCR. This is essentially the interest rate of interest rates. Moving it up or down will force banks to change their own interest rates.
Lower rates mean cheaper loans, cheaper loans mean more loans, more loans mean the economy runs hotter, and when the economy heats up, you get inflation.
When the economy takes off, the Reserve Bank cuts rates, making loans cheaper. That stimulates the economy by encouraging spending and investment. This means that the economy will improve, creating inflation and the bank, ideally, will increase rates so that inflation does not overheat.
What about house prices?
The reason we are in a bind at the moment is that OCR was already low in February when the crisis started, standing at just 1% in February. That doesn’t give the central bank much room to cut back.
During the financial crisis a decade ago, OCR dropped from a staggeringly high 8.25 percent to just 2.5 percent over the period of about a year.
With OCR already low, Orr doesn’t have that luxury. So the bank has been forced to use what it calls unconventional monetary policy tools to get the economy moving, get people to lend, and keep inflation and jobs where they should be.
ROBERT KITCHEN / Things
Is it time to turn down the music? Grant Robertson wants the Reserve Bank to start thinking about housing affordability.
The cornerstone of this is a program that will create $ 100 billion (yes, out of thin air) and inject it into the economy through the purchase of government bonds.
This month, the Reserve Bank also announced a scheme that would create up to $ 28 billion of money to give banks as cheap financing, allowing them to further lower their interest rates.
All of this is being done to achieve that broader monetary policy goal. The creation of all that money has lowered interest rates.
This is where housing comes in
Those low interest rates have had the unintended effect of inflating home prices. Lowering the cost of borrowing, and along with other measures, such as removing loan-to-value restrictions, has made it much cheaper to borrow a lot more money.
Unsurprisingly, people have invested this in the housing market, taking out bigger and bigger loans to secure their place on the ladder. That has raised prices to an inconceivable level.
Did you do something wrong?
No. The Reserve Bank is not socially responsible for housing prices and it is not financially responsible for them.
The central bank is responsible for the stability of the financial system, which means that it must be careful that prices do not rise so much that a fall collapses the banking system, but anything other than that is fair game.
High house prices are really helpful in that they make people feel richer. When people feel rich, they spend more and more expenses make the economy tick.
Orr is often a bit fussy when criticized for rising house prices is directed at him, and in a sense he’s right. It is simply doing its job.
What happened on Tuesday?
Robertson has a very distant role in telling the Reserve Bank what to do. He sets the bank’s mandate, telling it the type of inflation it should be targeting.
On Tuesday, Robertson wrote to the bank expressing concern about rising house prices and suggesting that the mandate should be changed to consider house price stability.
Robertson’s suggestion, and it’s just a suggestion for now, is that the Reserve Bank should still target inflation and employment, but when it does, it should keep in mind that house prices are also stable.
Robert Kitchin / Things
Reserve Bank Governor Adrian Orr helped boost house prices, but that’s partly because it’s his job.
Inflation and employment are still the targets, but when the bank makes its decisions, at Robertson’s suggestion, it would have to make them while trying to avoid unnecessary instability in house prices.
Reading between the lines, that means house prices would continue to rise, but not in the out-of-control way that they have.
Meanwhile, the government is trying to launch a construction program to solve the main supply problem.
¿Why is it so important?
This is a great move because the Reserve Bank is operationally independent from the Government. There is the fear, a fear that is currently being questioned in some circles, that if the central bank were not independent, governments would use it to create money (yes, out of thin air) to finance any kind of spending.
The risk is that this kind of undisciplined money creation leads to runaway inflation, simply because a government decided to use the Reserve Bank as a shameless money machine.
That fear has meant that the bank’s independence has been placed on a kind of pedestal. Suggestions by David Seymour of ACT and Andrew Bayly of the National Party that the government should consider forcing the bank to consider asset prices were rejected as dangerous and evocative of Sir Robert Muldoon.
Robertson has managed to get around this by writing to the bank about the mandate. This is something that he establishes and for which the Government and the bank are responsible, for which there has not been a technical violation of the bank’s independence.
That said, it is clear that the government has come under political pressure in its decision to write to the bank. It was probably the right thing to do and it was almost inevitable in the era of unconventional monetary policy, but it is still a great symbolic bridge for government to cross.
What happens next
At this stage, the Government and the Reserve Bank are only talking about proposals. There has been no concrete decision in any way. Orr will make a scheduled speech and answer questions from the media, including Things Wednesday, so we can expect to take the temperature of what you would like to do at that time.
The government and the bank are caught between a rock and a hard place. Rising house prices have been a key tool used to prop up the economy. The bank has made a strong case as to why placing restrictions on its ability to raise prices will simply make its job more difficult.
This is less of a problem now. The economy is already beginning to show signs of improvement, but a large part of that is because big companies are pricing in a lot of future stimulus from the bank. Most of the $ 100 billion money creation has yet to happen.
This could potentially force the government to borrow and spend more. Fiscal policy is what Robertson controls and it is his response to the bank’s monetary policy.
If the government makes monetary policy less effective, there is a chance that Robertson will be forced to take over and pump more cash into the economy.
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