The Government’s push for the Reserve Bank to take greater heed of house prices in its monetary policy shows it is wary of the political and fiscal risks of a turbocharged market – but will Adrian Orr play ball, and will the change make a meaningful dent?
Heading into this week, Reserve Bank governor Adrian Orr would have expected the state of New Zealand’s housing market to be on his agenda – but perhaps not quite like this.
Any fresh details on the proposed reintroduction of loan-to-value ratio (LVR) restrictions, dictating the deposit requirements for home loans, loomed as the major topic of discussion at the release of the bank’s latest Financial Stability Report on Wednesday.
But now, Orr has been thrown a curveball with Finance Minister Grant Robertson’s very public request that the Reserve Bank do even more to curtail the skyrocketing house prices that are proving a political headache for the Government.
At the release of the Government’s 2019/20 financial statements, Robertson revealed he had written to Orr asking for help to cool the market, specifically suggesting the remit of the Reserve Bank’s monetary policy committee (MPC) be expanded to include house price stability as a matter of importance.
While this does not impinge on the bank’s statutory independence, the decision is a sign of just how worried the Government is about where things are heading.
As his letter put it, house price instability “is harmful to our aims of reduced inequality and poverty, and is also likely to negatively impact the Government’s aim of creating a more productive and inclusive economy” – comments likely verging on understatement to some Kiwis locked out of the homeownership market or struggling for any form of secure, affordable accommodation.
Orr hardly seems happy to be the target of broader criticism for the state of the housing market: announcing the details of the FLP scheme earlier this month, he bemoaned the column inches being dedicated to the Reserve Bank’s role in the housing crisis when it had no official mandate to tackle the problem.
Robertson said the letter was sent on Tuesday morning, but it’s unclear how much warning – if any – Orr and the Reserve Bank received ahead of the formal correspondence.
While the Financial Stability Report and any decisions around LVRs fall into the basket of fiscal policy, distinct from the monetary policy change the Government has mooted, the document’s release will almost certainly be overshadowed by the issue and how the Reserve Bank responds.
Orr hardly seems happy to be the target of broader criticism for the state of the housing market: announcing the details of the FLP scheme earlier this month, he bemoaned the column inches being dedicated to the Reserve Bank’s role in the housing crisis when it had no official mandate to tackle the problem.
“All I ever read about with monetary policy is house prices, yet that’s not our mandate and I’d ask the journalists to reflect on that,” he said.
Of course, Orr is correct, and it is that lack of a mandate the Government is seeking to address.
Robertson’s decision won a warm reception from other political parties, albeit with some unseemly scrapping to claim credit for forcing his hand.
National’s shadow treasurer Andrew Bayly said he was “grateful” the Finance Minister had taken his advice, after last week calling for the Government to “rein in” the Reserve Bank by requiring it to direct FLP towards productive parts of the economy rather than the housing market.
Robertson dismissed the suggestion he was following Bayly’s lead, arguing the National MP had proposed direct, improper intervention in operational decisions rather than suggesting a higher-level, mutually agreed change to the bank’s mandate (a charge in turn rejected by Bayly).
ACT leader David Seymour also claimed credit for the idea, citing an October 16 interview with Interest.co.nz in which he questioned whether asset price stability should be among the Reserve Bank’s targets (although Seymour did not note the idea had not been ACT campaign policy but an informal response to a question from journalist Jenée Tibshraeny).
But the question of who first came up with the idea is less important than the fact there appears to be consensus across Parliament it is the right thing to do, which will surely factor into the Reserve Bank’s thinking as it considers how to respond.
But the proposal is not without some risks, most obviously how the committee is supposed to balance the competing, and possibly conflicting, objectives which it would be tasked with achieving.
In its Monetary Policy Statement published earlier this month, the bank drew a connecting line between rising house prices and increased household spending fuelling the economic recovery.
It is not a universally accepted argument, but if asked to keep house prices in check while maintaining price stability and maximum employment, the MPC may argue it faces an impossible task.
The tenor of Orr’s letter suggests he may not be inclined to bend over backwards for the Government: he said the MPC would “respond with considered feedback in due course”, but offered a staunch defence of its actions to date.
Robertson said he was not seeking to change those overarching remits, merely to take house price stability into consideration when aiming at those targets – but that then raises the question of just how meaningful the change would be in tackling housing market inflation.
Indeed, in his own letter responding to Robertson, Orr pointedly noted the MPC already takes into account the potential effect of monetary policy on house prices, along with high-risk lending for housing.
The Finance Minister was at pains to point out this was only the start of a dialogue, rather than an offer Orr couldn’t refuse, with other changes in the monetary or fiscal space up for discussion.
The tenor of Orr’s letter suggests he may not be inclined to bend over backwards for the Government: he said the MPC would “respond with considered feedback in due course”, but offered a staunch defence of its actions to date.
“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 wellbeing of all New Zealanders.”
Transformational change?
Even if the MPC does agree to the change of remit, it will be nowhere near enough by itself to fix the broader structural problems when it comes to housing. The reimposition of LVRs, or the introduction of debt-to-income (DTI) controls, could provide further ballast for the Reserve Bank on the fiscal side of the equation.
Robertson suggested the Government could broaden measures like the “bright-line test” to curb property speculation, while it still seems to be pinning much of its hope for supply-side improvement on an overhaul of the Resource Management Act.
But blaming the RMA is “a tired excuse” in the eyes of Green Party revenue spokeswoman Julie Anne Genter, with the party continuing its doomed crusade to get Labour to reverse its self-imposed ban on a capital gains or wealth tax.
Robertson, and Prime Minister Jacinda Ardern, are not for moving on that. They will hope Orr is willing to be more accommodating in their own request for a more innovative approach – or the Government may need to have a more meaningful reckoning about its own stubbornness on transformational action.
