24 Nov 2020

Finance Minister Robertson calls for Reserve Bank to tackle housing

9:33 pm on 24 November 2020

Finance Minister Grant Robertson wants the Reserve Bank (RBNZ) to become more involved in checking the skyrocketing price of housing in New Zealand.

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Photo: RNZ / Samuel Rillstone

Robertson has written to RBNZ governor Adrian Orr suggesting a change to the rules under which it operates, to take heed of the impact of any monetary policy on house prices.

"One proposal I am seeking advice from the Reserve Bank is on whether to include stability in house prices as a factor for consideration in the remit when formulating monetary policy," he wrote.

The RBNZ is already required to look to avoid unnecessary instability in interest rates and the exchange. Robertson's suggestion would add the words "house prices".

However, he said he was not looking to direct or instruct the RBNZ, nor change its primary mandates of managing inflation and maximising employment.

"I want to be clear I am not proposing any changes to the mandate or the independence of the Reserve Bank."

Robertson said the alternative monetary policies the RBNZ had implemented to counter the economic impact of Covid-19, such as the bond buying programme, low interest rates and backing bank loans had affected the housing market.

"I believe it is right that we consider how these tools might be impacting the housing market, with particular regard to housing price inflation.

He said it was the right time to work together to ensure stabiltiy in the housing market, "for those first home buyers to know that they will get a shot at buying a home."

How has RBNZ responded?

RBNZ governor Adrian Orr said the bank welcomed the opportunity to work with government on improving housing affordability, but said it had always considered the impact of its policy.

Reserve Bank governor Adrian Orr.

Reserve Bank governor Adrian Orr Photo: RNZ / Dom Thomas

"I can assure you that the MPC [Monetary Policy Committee], in making its decisions, gives consideration to the potential impact of monetary policy on asset prices, including house prices. These are important transmission channels that affect employment and inflation.

"Housing market related prices are also included in the Consumer Price Index, for example rents, rates, construction costs, and housing transaction costs."

Orr said house prices were also considered through a financial stability lens.

"We have for many years identified the risk that highly indebted households and businesses can pose to the financial system. This concern is why we recently signalled our intention to reinstate loan-to-value ratio restrictions for higher-risk lenders, in particular, property investors."

He also defended the Reserve Bank's lowering of interests rates.

"Lower interest rates promote spending and investment, thereby enabling us to meet our inflation and employment mandate over the

medium term."

He said dealing with house prices did not just fall with the Reserve Bank.

"As I've said publicly on many occasions, monetary and financial regulatory policy alone cannot address this challenge, there are many long-term, structural issues at play."

The bank would consider the feedback received and respond in due course, he said.

"Our monetary policy actions have been, and will continue to be, effective in supporting the economy through the Covid-19 economic shock. Effective monetary policy is incredibly important for our shared objective of promoting the prosperity and well-being of all New Zealanders."

What has the reaction been?

Last week, Shadow Treasurer Andrew Bayly called for Robertson to write to the central bank to impose conditions on the $28 billion Funding for Lending programme, to make sure it wasn't all pumped into the housing market.

Bayly said the government had done the right thing, even thought it had been slow to act.

"I have been pushing this angle for about 10 working days and I think it was a pretty easy solution to actually look at and I don't know why he didn't do it."

However, Robertson said he had not proposed any change to the bank's primary objectives, and was committed to maintaining its independence.

"What National was proposing was actually directly intervening and directing the Reserve Bank around a specific programme, the Funding for Lending Programme," he said.

"What I am doing is appropriately using the tools that we do have at our disposal, in particular, the monetary policy remit."

Sense Partners economist Shamubeel Eaqub said the action was well overdue and a "huge wake-up call" for the Reserve Bank.

"Their commentary and their position on house prices over the past two weeks has been tone-deaf and frankly unbelievable."

Eaqub said it should be more concerned about the wider stability of the economy and financial system.

"The Reserve Bank right now is creating harm in the economy by creating a bigger housing bubble in the middle of the biggest recession in our lifetime.

"We cannot blame anybody else. It is too much credit at cheap rates going into housing."

On the other hand, Infometrics senior economist Brad Olsen said the government was "bowing to political will."

"It is a step in the right direction to make sure that the Reserve Bank is taking into account house prices, but I don't think that's going to fundamentally shift how they set monetary policy and it's certainly not going to see any real check on these rampant house price growth figures any time soon," Olsen said.

"The fact remains that housing will take a while to be changed and it will require substantial government assistance, not the government shifting the blame."

Robertson's letter to the Reserve Bank Governor reinforced that the government had abdicated responsibility for the housing crisis, Olsen said.

"Because it refuses to make some of the necessary steps to increase supply. It's quite clear that we need more houses in New Zealand and that requires additional changes to regulations - we've seen that the RMA is in the go-slow track like every consent ever, alongside a lack of really large scale investment in infrastructure across the country."

Books in better shape

Meanwhile, the government's finances are in better shape than expected but remain deeply in the red.

Final audited accounts for the year ended June show a deficit of $23.1 billion, slightly less than figures given just before the election.

The strength of the rebound from the Covid-19 restrictions underpinned the tax take by nearly $3bn more than expected, while expenses were $5bn below the Budget forecast.

The net debt level was also lower than expected at 27 percent of the value of the economy.

Robertson said the quick response to the pandemic had prevented an economic collapse.

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