On a somewhat selective account of policy measures affecting the housing market

In the somewhat party-political and evidence-light press release on housing the Reserve Bank has just released…

“Much more rapid progress in producing new housing is needed in order to get on top of this issue. Tax policy is also an important driver, and we welcome the changes announced in the 2015 Budget, including the two year bright-line test, the proposed non-resident withholding tax and the requirement for tax numbers to be provided by house purchasers.”

…it is perhaps not too surprising that, once again, there is no reference to the enhanced first-home buyer subsidies announced, as it happens, a year ago today, as the centrepiece of the Prime Minister’s launch of the National Party election campaign.   We know quite a lot about first home buyer subsidies.  In the presence of supply constraints, all they do is bid up the price of houses (house plus land).  Other countries have tried them (Australia closest to home).  They don’t raise home ownership rates or do any socially useful thing.  And, if the subsidies don’t last for ever (which they often don’t, especially in real terms –  for example, Sir Robert Muldoon had a short-lived one of these subsidies late in his term), they simply increase the risk of a nastier correction in house prices later.  Those corrections are what the Governor, and his deputy, often tell us they are worried about.

You might think it would be inappropriate for an unelected central bank to be commenting on party election promises, even when they become legislated government policy.  And I would have some considerable sympathy with that position.  But the same surely goes for other aspects of tax policy, regulatory policy, government data collection policy and so on (eg the list in the press release), all of which are contentious in some circles or other.  Oh, and was there any mention of the role of immigration policy –  the bit directly controlled by central government?

Today’s papers report on the take-up of the enhanced subsidies. Fortunately, perhaps, Auckland prices are already too high for many potential Auckland buyers to bid prices higher.  But elsewhere, in Tauranga, for example, where people worry about the spillover from the Auckland boom, those who’ve used that subsidy will have bid prices up just a little faster than otherwise.  But no mention of it from the Reserve Bank?

In getting so involved with regulatory matters, that go well beyond its areas of responsibility, the Reserve Bank is playing a dangerous game.   There is a strong, but not unarguable, case for central bank autonomy on monetary policy, but the case is much harder to sustain when the unelected Governor is weighing in, with words and actions, to decide who should and shouldn’t get credit, what general regulatory interventions make sense, and which he thinks don’t.  And when it stays quiet on really bad policy that drives house prices higher, but helped generate some useful headlines in the middle of an election campaign,

The Governor –  and his deputy –  would be well-advised to stick to their knitting.  Get inflation back to around the middle of the target range and keep it there (it would make a change), and focus on indirect instruments (capital requirements) to promote the continued soundness and efficiency of the financial system.  And leave the rest to the political debate, and decisions made by those whom we can hold to account.

10 thoughts on “On a somewhat selective account of policy measures affecting the housing market

  1. Why is it inappropriate for a RB charged with looking after monetary and financial-sector stability to comment on threats to those goals, merely because the threat comes from a government initiative or lack of initiative ?

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    • They need to be very careful in doing because they can’t afford to be seen as partisan if they want to be independent, and favourably commenting on some policies but not others creates a high risk of being perceived as partisan. There is a difficult balance, but actually none of these policies (first home subsidies, immigration policy, RMA excesses, CGT or not) need affect financial stability given the indirect tools the Bank has open to it (risk weights and required capital ratios).

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  2. Appreciate the RBNZ is taking a more lateral approach to its mandate than what you would otherwise prefer and it is obvious that it winds you up. But you also acknowledge house prices are escalating dramatically in Auckland and that the Government’s promotion of immigration is a big part of that.

    Where the RBNZ has jawboned some action is from the Government. It is clear from official information requests that Government were only prompted into action by RBNZ speeches and they have started to take *some* action.

    On a net basis then do you believe the RBNZ are doing more harm than good with their lateral thinking?

    From my own perspective I don’t buy into your argument that because the empirical evidence of investor risk in NZ is weak there is insufficient reason to take action to limit their impact on the Auckland housing market as the weight of external evidence however removed is more relevant. I also applaud the RBNZ’s use of macro prudential tools not only for cooling the Auckland housing market but as it reduces the need to keep interest rates elevated at unnecessary levels . I also applaud their bowshots at Government – as it is the only thing that has prompted any interest or action from Government on house prices.

    Most of us in the financial and banking sector are not as relaxed on the Auckland housing market as economistis and treasury which says something.

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    • Interesting question.

      I think, on balance, I would regard them as doing more harm than good. That is partly because if the RB prompted any other action – and I suspect any difference was a modest difference of timing (given the electoral salience of the housing issues) – the actions they prompted, and the actions they themselves have taken, have been retrograde steps. I don’t believe there is a good case for a CGt (or hence a brightline test), and the efficiency costs of the LVR restrictions are real.

      I’d be a lot more comfortable if their contributions were grounded in solid research, but there has been no sign of that on any of this. There are lots of ad hoc comments and observations, based on little we outsiders can observe (and hence test).

      Interested in your comments about the unease in the finance/banking sector. I’m very worried about the outlook for the economy, and a nasty contraction in Akld house prices seems quite likely, but banks get into trouble when credit standards deteriorate across the board, and so far no one has presented evidence of that having happened.

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      • Thanks Michael for the response which is appreciated. You do certainly play a fantastic role in a worthy debate.

        I suppose where I am not (yet) fully aligned with you is on the quality of RBNZ research. First, today’s announcement showed a pretty clear skew of high price/income multiples for investors which is new but not unexpected. And the share gains made by those individuals.

        I know you have alluded to it in the past with respect to Wheeler’s experience in the United States which would have shaped some of his views, regardless of that exerperiences direct relevant to NZ, which is a reasonable one.

        But in a post GFC world how ungodly terrible would it be to repeat the mistakes made by others so soon? No doubt that plays on everyones mind, including mine.

        I dont doubt there hasnt been significant research but the dearth of it suggests that the emerpical case for investor limitations in NZ is weak. But we have gone 25 years without a meaningful correction and I do feel obliged to give more weight to external experiences than to our own.

        On the issue of stress testing while our banks came through okay the point that the second stage knock on effect not being explicity included is relevant, as we all know that the death spirals of less lending will compound and compound again, and it is those follow on impacts that really impact an economy – not the first one.

        I also am thankfully the RBNZ feel emboldened enough to make these statements about the lack of progress and structural issues as they arent making any friends in goverment but that is the whole point – they should be and are able to make statements like this as unelected (which you say rather ominiously) without the immediate fear of losing their job. That is how it should be.

        But likewise I acknowledge your point that they do not comment on the stupid and venal Government policy of promoting a first home buyer subsidy, which everyone knows what it creates, but again, did anyone have direct NZ emperical evidence to understand that?

        The problem I have with academic economists and treasury is that the market is not a pretty little spreadsheet. Everyone tries to game the market and more often than not at the same time. As a direct market practioner, it is clear that everyone is doing that now, and will do that at the first chance the trend starts to disappoint expectations. Or maybe I have read too many Soros books.

        But one thing we agree on is that Auckland, at some point in the medium term, will have a nasty correction.

        I really do believe that immigration is just a tool by National to increase house prices which in turn they believe is good politics, and their excuses for not limiting is just that, and excuse.

        And while a technical debate about immigration being either a long term absolute impact, or the relative rate of change and how that impacts house prices is a good one and one that I am not clear of. But as someone who happily believes in bubbles and the wealth created out of riding them, I’d suggest that perceptions of immigration are more important. Yes, absolutely, more heads need more beds. But that is well understood by investors, who go on to capitalise it and or trade on it, preying on others who believe it will go on forever. Concepts of price increases can be grounded by good economics, but the actual changes of price are ultimately more to do with expectations, than with good economics. So Shamu has a point, but a debateable one (as everything is).

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      • Interesting comments again, thanks.

        I will comment more on Grant’s speech tomorrow, and I did think there were interesting snippets there, but none of it was put together in a framework that I (at least) found convincing. And it was very much a macroeconomist’s perspective – as a former colleague put it to me, there was little sign of any/much rich information on credit standards. When banks get into trouble it is usually because credit standards were quite badly debased.

        I’m not suggesting they can do much detailed research on NZ itself, altho as I’ve noted to them it would be interesting to have data on the loss experiences in some of the provincial cities where house prices have been falling for some years. But perhaps more importantly, they could (and should ) be doing more on the similarities and differences in the overseas country experiences. US, Irish and Spanish housing markets gave rise to losses – altho I phrase that carefully as in Spain the big banks weren’t badly affected, and in Ireland property development losses were much more important – but Canada, Australia, NZ and the UK didn’t have that experience after 2007, despite what might have looked like superficially similar prior credit and asset booms. I’ve prodded them – while in the Bank and since – to identify a single systemically significant bank anywhere in the world brought down by vanilla housing lending (nz style). I haven’t been able to find one, and no one has offered a case. Similarly, has a systemic banking crisis ever happened when credit has grown no faster than nominal GDP for the previous 6-8 years (crisis seem to have their roots in credit and investment misallocation booms in the perhaps 3-5 years leading up to the crisis). There might be good answers to each of these points (rb has many more research resources than I do) but there is no sign that they have even made the effort. that might be an acceptable standard from politicians, but we should expect more from independent officials. And the Bank’s stance would command more respect if more of this research was there – some of it they wouldn’t even need to say, as the research results would speak for themselves (and people like me would write them up).

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  3. One is left wondering who actually is now in charge of policy in NZ.
    Is it the RBNZ or is ti the Govt. I know the Govt. is not much good at policy but the RBNZ really doesn’t have a mandate to set any rules to anyone other than financial Institutions.

    Worse than the unelected in Unions.

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  4. and yes – from a buyside perspective where I come from – the rampant rise isn’t just the biggest socio-economic issue – but it is a real tangible issue on where we place our capital. And I will tell you what – the winds are sailing outside Auckland and outside cyclicals. Money talks and I hope to be an early player – but what is happening in Auckland and risks compounding an increasingly dangerous macro global/domestic commodity situation and capital is starting to flow in advance of it.

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  5. Hi Michael – nice to see we have similarly extremely exciting Monday nights! I couldnt respond immediately below your post so I will do it here.

    I suppose I will agree with you that less than desirable studies have been released by the RBNZ, which I assume is because they don’t support the cause. And while I do not particularly like the ‘this time it is different’ argument – in some material respects it is.

    I wont leave too much more a diatribe but focusing on the UK, AU, and NZ is very much cherry picking the best performers. An interesting follow-up analysis is to understand why that is and is it sustainable?

    Credit growth is a relative thing. I am more concerned about a country’s credit growing at 5% when its debt/income ratio is at 160% than a country whose credit is growing at 10% where they are at 60%. And we shouldn’t forget our household debt is at an all time peak, and actually growing quite quickly, and sadly, picking up steam to pre GFC levels. The run rate increase should be terrifying to all, but seems to be evident to none.

    And credit standards are always extremely chirpy at the peak, as they tend to be backward looking. No bank or forecaster is bold enough to forecast the depth of what is to come, despite the laurels of the same positive appreciate just before the peak.

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  6. Yes, take the cherrypicking point. My point was really just that there was a huge range of experiences and we should be learning from the whole range not just (the idiosyncracies of) Ireland and the US.

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