Ahead of this week’s Monetary Policy Statement, Reserve Bank economists have indicated rising house prices are part of what we pay for financial stability – a stance that Shamubeel Eaqub finds worryingly relaxed.
House prices are up by 15 percent over the last year. In the middle of a once-in-a-generation recession, massive job losses and zero net migration. Proof enough the Reserve Bank’s current oversight of banks and financial stability is not fit for purpose. Finance Minister Grant Robertson will need to make clear what the Reserve Bank is meant to achieve.
Financial stability perspective: What do they mean by financial stability? Banks failing, or misallocation of capital and asset prices (to very high levels), which increases the future risk of asset price falls, bankruptcies, and economic disruption?
They seem to think about the economy in the aggregate, except policy always has a distribution impact. When we think about the efficacy of policy decision, we look to efficiency and equity. Is it the best decision, and who are the winners and losers?
Their relatively nonchalant approach to house prices rising in the middle of the biggest recession, and an economy being propped up by unprecedented fiscal response, suggests they do not understand what is happening in NZ right now.
Job losses are concentrated in under 30s, women and people working relatively precarious and lower paid jobs. Rising unemployment for these people will not have much of an impact on house prices.
The consistent empirical reality of unemployment and house prices sound like the lead up to stagflation – when the empirical reality was that inflation and unemployment are inversely related. Except when it wasn’t…
They are choosing to fuel the housing boom, on top of a series of booms. They should be making choices about how much money is working through the economy, and where it is turning up.
The Reserve Bank is now inherently political. Its policy actions, or more like inaction, is entrenching generational inequality.
Housing perspective: Taking a housing perspective, the lessons from the experience of the last three decades is that we need to better manage how much credit is in the economy, and whether they are flowing through to all parts of the economy.
There can be a temptation to direct banks to lend to housing developments, or to limit how much they lend to housing, or what terms they lend. But each come with their costs and benefits. A good way to do this is to ask an independent regulator, the Reserve Bank of New Zealand, to take responsibility for the method, but to be explicit on the goals and objectives they are trying to achieve.
This is particularly important at a time of very low interest rates and increasing complexity of banking regulation. A lightly resourced and lightly regulated banking sector is no longer the norm. The Reserve Bank is stuck in 1980s thinking. Banks are too big to fail. House prices are too high to be allowed to fall.
The Reserve Bank is now inherently political. Its policy actions, or more like inaction, is entrenching generational inequality.
Phase 2 of the review of the Reserve Bank of New Zealand Act 1989 is an opportunity to clarify the goals and objectives desired from the banking sector when it comes to housing. The detail of how to do it is complex and needs a gradual approach. Step change could cause massive economic, financial and social disruption.
There are three ways to improve on current practices:
Three immediate ideas:
• Put back LVR restrictions on investors
• Introduce loan to income ratios.
• Explicitly treat investment property as a business loan.
Three medium term ideas
• Implement a financial stability agreement that requires the RBNZ to consider the amount of leverage and efficient capital allocation to enhance economic performance.
• Adopt government expectations for good regulatory practice so that decisions are evidence-based, validated and vetted.
• Ramp up governance expectations and better resource the RBNZ to deal with increased scope of work, oversight and accountability by increasing internal resourcing.
The key long term goal: build more houses.
