Westpac Economists Expect House Prices to rise as much as 15 percent Next Year.

Reserve Bank says it's not responsible for housing crisis as it unveils $28b of cheap funding for banks aimed at housing

Thomas Coughlan 20:02 Nov 11 2020

An Auckland house hunter is shocked by the number of properties she's missed out on that come onto the rental market just weeks after being sold.

Despite funnelling billions of dollars into the economy in a bid to bring the cost of borrowing to record lows, the Reserve Bank isn’t taking responsibility for New Zealand’s housing woes.

RBNZ Governor Adrian Orr would also appreciate if the media wrote as much about New Zealand’s strong record on keeping employment levels high as we do writing about the housing crisis.

His remarks came as the RBNZ announced it would be rolling out a new scheme for retail banks, giving them access to cheap funding, which they could pass on in the form of even cheaper loans to households and businesses.

The scheme could end up giving about $28 billion worth of funding to banks and, as the Reserve Bank opted not to target the scheme, most observers believe the money will end up flowing straight into the housing market.

House prices are continuing to rise despite concerns about the broader economy.

To blunt the edge and with an eye to ensuring the stability of the financial system, the RBNZ also said it would consult on bringing back restrictions on high-risk lending in the form of the return of loan-to-value restrictions (LVRs), which were taken off in April, for a term of 12 months.

The Bank now says they could return as early as March.

Speaking after the announcement, Orr expressed frustration at being pinned with the blame for higher house prices – especially seeing as the Reserve Bank has no direct responsibility to make sure house prices don’t inflate out of control.

When talking about employment, Orr was irked about the focus on house prices.

“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.

“My colleagues talked about the fact there’s something like three house price indices that come out monthly which means nine-to-one reports on house prices versus unemployment, which is fascinating for newspaper clips and clickbait but it's not in our mandate.”

Reserve Bank Governor Adrian Orr says skyrocketing house prices aren’t his fault.

Observers note Orr is correct.

Infometrics Economist Brad Olsen said the Bank put in a difficult position where it had officially ignore pain in the housing market.

“The Reserve Bank is stuck between a rock and a hard place because they don’t have a mandate, and they are therefore explicitly blind to asset price rises when it comes to monetary policy,” Olsen said.

The Reserve Bank has a strict mandate to make sure the price of things – as measured by CPI – stays level, while keeping employment at its maximum sustainable level.

But the RBNZ does use rising house prices to achieve both of those goals, through the wealth effect. When house prices go up, people feel wealthy and are more inclined to spend. That spending boosts growth, ideally creating inflation and employment.

The Bank acknowledged this in its Monetary Policy Statement (MPS) on Wednesday, saying “increasing asset prices is also supporting household spending”.

“Household wealth has historically been a driver of household spending”.

High house prices aren’t the bank’s goal – but they’re a useful tool and the bank is quite keen to keep using it. Funding for Lending (FLP) could tip $28b into banks.

Ideally, some of that lending will go to businesses looking to grow, but the Reserve Bank’s decision to leave it completely untargeted means every last cent of it could end up in the housing market.

Westpac economists expect house prices
to rise as much as 15 per cent next year.

A note from ANZ’s chief economist, Sharon Zollner, said the scheme would have a larger impact on housing than business lending, mainly because businesses were simply too uncertain to borrow right now.
“[Firms] are wary of investing until the economic outlook becomes clearer,” she wrote in a note.

Kiwibank’s chief economist, Jarrod Kerr, was hoping for some targeting – or at least a system whereby banks were encouraged to lend more to businesses, rather than homeowners.

He suggested a scheme were for every dollar banks lent to businesses they received $5 of cheap funding in return.

“It really encourages money to go to business lending,” he said.
But arguments about targeting being ineffective appeared to have prevailed.

There has been a growing movement, sparked by comments from ACT leader David Seymour for the bank to consider high house prices more directly.

The Bank is much more keen to talk about the issue of housing supply. On Wednesday, Orr pointed to a 2012 Productivity Commission report into Housing in New Zealand which talked about regulation and building costs as drivers of high house prices in New Zealand, rather than interest rates.

“Interest rates weren't mentioned,” Orr said.

“There are so many other factors going on around which we all talk about and none of them are here at the Reserve Bank.”

The Reserve Bank’s printed Monetary Policy Statement only cited the executive summary, which doesn’t mention monetary policy or interest rates. The full report actually makes extensive comments about how low interest rates “fostered both an appetite for borrowing and a search for investors ‘for yield’,” which “created upward pressure on house prices, particularly if the supply of housing was slow to respond”.
Orr later clarified the interest rate “without doubt will alter asset prices amongst many other things that will alter asset prices”.

There has been a growing movement, sparked by comments from ACT leader David Seymour for the bank to consider high house prices more directly when it makes monetary policy considerations.

National’s new treasurer, Andrew Bayly, said National wasn’t keen, saying it would give the bank too many targets to hit – which could be problematic if it had to choose between them by, for example, sacrificing its inflation target to hit its house price target.


The National Party isn’t keen to make house prices a target for the Reserve Bank.

Orr said he wouldn’t comment about such a proposal, but deputy Governor Geoff Bascand said the issue could come up in the bank’s five-yearly remit review.

“We’re required to have a remit review every five years so that will be the Reserve Bank’s advice and Treasury’s and ultimately the Minister’s decision on how our targets should be specified and that sort of issue will be considered at that time, whether it's still appropriate,” he said.

“You always have those discussions about the CPI and what its measuring and is that the right target for inflation and I think over the next few years there’s opportunity for research and thought about that.”

Bur Orr poured water on the suggestion the bank might use this review to seriously consider putting a lit on rampant house price inflation, noting similar ideas had been rejected overseas.

One area the bank could be concerned about house prices is their effect on overall financial stability, particularly if homebuyers are no loner able to service mortgages.

“It's not house price inflation it is the amount and level and proportion of high risk loans that we are concerned about,” he said.

“High-risk loans are the ones where you are very leveraged and you might have a small shift in your employment status your household income status the interest rate of the price you are paying and you suddenly can’t afford that.

“That could happen if unemployment rises and it happens across a broad swathe of homes who are highly leveraged.”