The Reserve Bank has been firing shots across the bow of the speeding housing market, but there is doubt about how much it can do – or even wants to do.
When Reserve Bank Governor Adrian Orr said he was willing to step in to address “early signs” of rising house prices being driven by investors, not households, he set off a trenchant debate about who was to blame. There was shouting. There was name-calling.
Amid the heat and fury, there were two questions that few people asked.
First, does the Reserve Bank really want to put the brakes on asset prices in the middle of the deepest recession since the Great Depression? Or is it just talk?
In this week’s Monetary Policy Statement, the Reserve Bank will announce details of a Funding for Lending Programme expected to inject $30 to $50 billion into the banks, to loan to Kiwis to help spend the economy out of its Covid-19 hole.
“It’s the most difficult thing my wife and I have done in our lives … We almost stopped the project because it was getting too expensive. And we’re not trying to build something flash – we’re trying to build a cheap bach.”
– Jarrod Kerr
Economist Shamubeel Eaqub pointed to clues from the Reserve Bank’s chief economist last month, in which Yuong Ha acknowledged the FLP would push house prices up, in turn increasing homeowners’ wealth and confidence. “And the logical conclusion is people spend more, right? And that supports the economy,” Yuong Ha said.
Writing on Newsroom today, Eaqub expressed concern at this: “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 New Zealand right now.
“House prices are up 15 percent, 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.”
The second question is, even if the Reserve Bank does want to slow house prices, could it?
Kiwibank chief economist Jarrod Kerr and his wife have been building a bach at Mangawhai. “It’s the most difficult thing my wife and I have done in our lives,” Kerr said.
It was a reminder, he said, that the long-term problem was the high cost of supplying housing – not the demand from first homebuyers or from investors. And that meant the tools used by the Reserve Bank to constrain demand would not address the long-term problem of the cost of supplying more houses.
“We almost stopped the project because it was getting too expensive. And we’re not trying to build something flash – we’re trying to build a cheap bach.”
“At the moment we’re in a different type of environment – one where there’s a big economic contraction, and we’re trying to create an environment by lowering interest rates, by making money available, that we can actually encourage recovery … Having observed the house prices, we’re reasonably confident that it does flow through to higher spending.”
– Christian Hawkesby
The only way they were able to manage the costs was to import everything. “Buy local” was not an option.
“Despite the massive cost blowouts, we managed to build a house far cheaper than buying ready-made,” Kerr said. “We had to import all the materials from Australia, however.
“We designed a kitset home through an Australian company. All our steel frames, roofing, gib, doors and windows – everything except insulation came from Australia. The Aussies have economies of scale.”
So if it costs so much to build new homes, then there’s little hope of reining in the rising prices on existing “second hand” homes – and that’s where the Reserve Bank’s freshly-printed money will go.
The Reserve Bank would like its Funding for Lending Programme money to go to businesses, to help them survive and expand through coming months. It acknowledges, though, that much of the money will instead go into the mortgage market.
“They are choosing to fuel the housing boom, on top of a series of booms.”
– Shamubeel Eaqub
Adrian Orr has warned that if they see high leverage property loans again, they will clamp them with tools like loan-to-value ratios (removed in May) and debt-to-income ratios.
The Reserve Bank regards the impact on the housing market of the Funding for Lending Programme and high loan-to-value ratio lending as different issues, albeit connected.
Assistant Governor Christian Hawkesby said last month: “At the moment we’re in a different type of environment – one where there’s a big economic contraction, and we’re trying to create an environment by lowering interest rates, by making money available, that we can actually encourage recovery … Having observed the house prices, we’re reasonably confident that it does flow through to higher spending.”
In the view of economist Eaqub, the bank is sending mixed messages.
“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,” he said.
The Reserve Bank was now “inherently political … entrenching generational inequality.” In the review of the bank’s empowering legislation, Finance Minister Grant Robertson should lay out clear goals and objectives around housing, Eaqub said.
But in the meantime, Orr should move quickly to put back LVR restrictions on investors, introduce debt-to-income ratios, and explicitly treat investment property as a business loan – with the more intense scrutiny that entails.
“Demand, if it’s strong, it’s strong. And it’s strong because people want a home. And it’s both people needing a home to rent, and people needing a home to buy. And there’s no point blaming each other.”
– Jarrod Kerr
On the supply side, Kiwibank’s Jarrod Kerr said what was needed was a Government-led, public-private, coordinated response.
That would include reform of the Resource Management Act, and a lot more infrastructure into greenfield or brownfield areas. “The biggest problem is developing the land: We’ve got heaps of land, but why can’t we unlock it, cheaply?
“The price of building is incredibly expensive in New Zealand. So looking at ways in which we can reduce the cost of building, and whether that’s prefabrication or more coordination.
“From our point of view it’s the supply side, that’s the issue. Demand, if it’s strong, it’s strong. And it’s strong because people want a home. And it’s both people needing a home to rent, and people needing a home to buy. And there’s no point blaming each other. It’s looking at why there’s a shortage of both.”
