24 Nov 2020

The Reserve Bank and the housing crisis

From The Detail, 5:00 am on 24 November 2020
Reserve Bank governor Adrian Orr and ACT Party leader David Seymour.

 Reserve Bank governor Adrian Orr and ACT Party leader David Seymour. Photo: RNZ

The Reserve Bank is under attack for pouring fuel on the house price bonfire with its latest move to boost the economy, but its defenders say it’s not the bank's job to control the housing market.

"It’s been dragged in because it was the innocent bystander at the scene of the crime, and everybody goes, 'oh, it looked like him'," says RNZ's business editor Gyles Beckford.

On The Detail today, Beckford explains the role of the Reserve Bank - the banks' bank - and why is has been caught up in a political storm.

The government is rejecting opposition calls for the central bank to be reined in, with the Prime Minister Jacinda Ardern saying political parties shouldn’t be interfering with the independence of the Reserve Bank.

The stoush is over the central bank's latest move to pump $28 billion into the economy over the next couple of years through cheap loans to banks in a ‘funding for lending’ programme. The banks then pass on the cheap money to home buyers and businesses. 

Critics blame the Reserve Bank for helping drive runaway house prices even higher by making it easier for property investors to access low interest loans. It is the latest in a series of moves by the bank in recent months to boost the economy hit hard by the covid crisis. In March the bank cut the official cash rate - the wholesale rate - to commercial banks to a record low and a month later it scrapped the loan-to-value lending restrictions. Banks are starting to introduce LVRs again as economists warn of an overheated housing market.

Beckford says the Reserve Bank has no control over house prices and the governor, Adrian Orr, has become "increasingly grumpy" about being blamed.

"In a reasonably direct way of course they are (responsible) because they have lowered the cost of borrowing to absurdly low levels. It’s cheap to borrow but the Reserve Bank says, 'we don't determine housing policy, that's what governments do, that's what the market does'.

“But they have got dragged into it because they're the means by which the housing market booms."

Beckford explains why it is more complicated than saying it boils down to lack of housing supply.

"It's a combination of reasons, some of it is cost, some of it is the ability to get the finance, some of it is the influence of rents and interest rates, but it’s a big melting pot," he says.

He cites other factors, such as the number of houses being offered for sale at multi-year lows, new housing developments hampered by red tape and local body zoning, land bankers or property owners sitting on idle land waiting for prices to rise, the impact of migration in recent years and the falling stock of state housing.