11 Dec 2020

Reserve Bank rejects request for help fixing the housing crisis

5:40 pm on 11 December 2020

The central bank has rejected the suggestion of adding a house price consideration to its monetary policy remit, saying the government should add it to its financial policy remit if it wanted to strengthen its role in the market.

Finance Minister Grant Robertson and RBNZ Governor Adrian Orr.

Photo: RNZ / Gyles Beckford

Finance Minister Grant Robertson wrote to Reserve Bank governor Adrian Orr last month suggesting the change - a move which Orr took to mean an offer for the RBNZ to offer its thoughts on ways to cool the housing market.

In a detailed reply to Robertson released today, Orr said adding a house price consideration to the financial policy remit was its preferred option.

"This could be achieved using the Reserve Bank of New Zealand Bill (RBNZ Bill), which is due to have its first reading this week. The RBNZ Bill contains a provision for you to issue a Financial Policy Remit to which the Reserve Bank must have regard in its pursuit of its financial stability mandate.

"We are keen to engage with you on the definition of the house price consideration. It is important that it accurately captures the government's concerns about the housing market and the unique role of the Reserve Bank in relation to the complex and multifaceted drivers of housing market."

Orr said this option was preferable to adding a house price consideration to the monetary policy remit, which could result in trade-offs, including higher interest rates, leading to lower employment and below target inflation rates.

He also reiterated the RBNZ's suggestion debt-to-income ratios be introduced from a financial stability perspective, however pointed out this may disadvantage-lower income and lower wealth households.

The briefing said many factors affected house prices, including availability of land, building regulations and taxes.

"Previous government studies have identified housing supply as the most significant determinant of house prices in New Zealand, with responsive housing supply essential for ensuring positive and sustainable housing outcomes.

"Suppressing housing demand factors can reduce house prices, but will only prove to be a temporary intervention until supply responsiveness is re-established."

Orr said government agencies already had a "wide range of levers" to address housing issues and that clarifying the "end goal" was important.

"Given the wide range and number of parties involved, and the complexity of underlying issues, there is a need for a single agency or 'clearing house' to co-ordinate the government's response across agencies. The Reserve Bank welcomes the opportunity to participate within the government's wider response."

Robertson said he would wait until next year before making any decisions.

"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," he said.

Government 'lacking clear direction'

One of National's Finance spokespeople, Andrew Bayly, said Orr had confirmed in writing that the government "lacked a clear direction" on housing.

"It's clear from the Reserve Bank's letter that the government is not doing enough in terms of its own responsibility to improve the housing supply.

"This includes a whole range of measures: amending the RMA quickly, ensuring adequate supply of land, addressing the issue of increasing construction costs and making sure building regulations are fit for purpose," he said.

Bayly said the recommendation for a 'whole of government' response showed that it is not utilising all of the tools at its disposal and a more "vigourous" response was needed.

He urged Robertson to take up Orr's suggestions.

"We've wasted a month already. We need action and we need action now", he said.

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