The Reserve Bank and housing collapses

In early December, the Reserve Bank published a Bulletin article, “House price collapses: policy responses and lessons learned”.  The article wasn’t by a Reserve Bank staffer –  it was written by a contractor (ex Treasury and IMF) –  but Bulletin articles speak for the Bank itself, they aren’t disclaimed as just the views of the author.   Given the subject matter, I’m sure this one would have had a lot of internal scrutiny.  Or perhaps I’ll rephrase, it certainly should have had a lot of scrutiny, but the substance of the article raises considerable doubt as to whether anyone senior thought hard about what they were publishing in the Reserve Bank’s name.

I’ve only just got round to reading the article and was frankly a bit stunned at how weak it was.    Perhaps that helps explain why it appears to have had no material media coverage at all.

The article begins with the claim that

This article considers several episodes of house price collapses around the globe over the past 30 years

In fact, it looks at none of these in any depth, and readers would have to know quite a bit about what was going on in each of these countries to be able to evaluate much of the story-telling and policy lessons the author presents.

Too much of the Reserve Bank’s writing about house prices tends to present substantial house price falls as exogenous, almost random, events: a country just happened to get unlucky.  But house prices booms –  or busts –  don’t take place in a vacuum.  They are the result of a set of circumstances, choices and policies.

And none of the Reserve Bank’s writings on housing markets ever takes any account of the information on the experiences of countries which didn’t experience nasty housing busts.  Partly as a result they tend to treat (or suggest that we should treat) all house price booms as the same.  And yet, for example,  New Zealand, Australia, the UK and Norway all had big credit and housing booms in the years leading up to 2008 but –  unlike the US or Ireland –  didn’t see a housing bust.  What do we learn from that difference?   The Reserve Bank seems totally uninterested.   Their approach seems to be, if the bust hasn’t already happened it is only a matter of time, but 2018 is a decade on from 2008.

One particular policy difference they often seek to ignore is the choice between fixed and floating exchange rates.  When you fix your exchange rate to that of another country, your interest rates are largely set by conditions in the other country.  If economic conditions in your country and the other country are consistently similar that might work out just fine.  If not, then you can have a tiger by the tail.  Ireland, for example, in the 00s probably needed something nearer New Zealand interest rates, but chose a currency regime that gave it interest rates appropriate to France/Germany.    Perhaps not surprisingly, things went badly wrong.

In the Bulletin article, the Bank presents a chart showing “house price falls in [10 OECD] selected crisis episodes” (surprisingly, not including Ireland).  But of those, eight were examples of fixed exchange rate countries (in several cases, the associated crisis led the country concerned to move to a floating exchange rate).   The same goes for all the Asian countries the author mentions in the context of the 1990s Asian financial crisis.     There can be advantages to fixing the exchange rate, but the ability to cope with idiosyncratic national shocks in not one of them.     And yet in the ten lessons the author draws in the article, there is no hint of the advantages of a floating exchange rate, in limiting the probability of a build-up of risk, and then in managing any busts that do arise.    It is a huge omission.  As a reminder, New Zealand, Australia, Norway, the UK, and Canada –  the latter a country that has never had a systemic financial crisis –  were all floating exchange rate countries during the 2000s boom and the subsequent recession/recovery period.

The author also hardly seems to recognise that even if house prices fall, house prices may not be the main event.   Even the Reserve Bank has previously, perhaps somewhat reluctantly, acknowledged the Norges Bank observation that housing loan losses have only rarely played a major role in systemic financial crises.   But there is no hint of that in this article.     Thus, in the severe post-liberalisation crises in the Nordics in the late 1980s and early 1990s, house prices certainly went up a lot and fell back a lot too, but most accounts suggest that those developments were pretty marginal relative to the boom and bust in commercial property, in particular development lending.  The same story seems to have been true for Ireland in the crisis there a decade ago.  Housing also wasn’t the main event in Iceland –  a floating exchange rate country not mentioned here that did have a crisis.  Even of the two floating exchange rate countries the article mentions –  Japan and the United States –  only in the United States could housing lending, and the housing market, be considered anything like the main event (and the US experience may not generalise given the very heavy role the state has historically played in the US housing finance market).

(And as I’ve noted here before,  even the US experience needs rather more critical reflection than it often receives: the path of the US economy in the decade since 2007 wasn’t much different to that of, say, New Zealand and New Zealand experienced no housing bust at all.)

Some of the other omissions from the article are also notable.  The author seems quite uneasy, perhaps even disapproving, about low global interest rates (without ever mentioning that inflation has remained persistently low), but there is no hint in the entire article that neutral interest rates may have been falling, or that global trend productivity growth may have been weak (weakening before the 2008/09 crisis showed up).   Thus, where economic activity is now –  10 years on –  may have little or nothing to do with the specifics of housing market adjustments a decade ago.   And although he highlights the limits of conventional monetary policy in many countries (interest rates around or just below zero), again he doesn’t draw any lessons about the possible need for policymakers to give themselves more room to cope with future downturns (by, for example, easing or removing the technological/legislative constraints that give rise to the near-zero lower bound in the first place.)

It is also remarkable that in an article on housing market collapses, there is only one mention of the possible role of land use restrictions in giving rise to sharp increases in house prices in the first place.   And then it is a rather misguided bureaucrats’ response: because supply may eventually catch up with demand the public need wise officials to encourage them to think long-term.  Perhaps the officials and politicians might be better off concentrating their energies on doing less harm in the first place –  whether fixing exchange rates in ways that give rise to large scale misallocation of resources, or avoiding land use restrictions that mean demand pressures substantially translate in higher land and house prices.

But in all the lessons the Bank (and the author) draw in the article, not one seems to be about the limitations of policy and of regulators.   There are typical references to short-termism in markets – although your typical Lehmans employee had more personal financial incentive (deferred remuneration tied up in shares that couldn’t be sold) to see the firm survive for the following five years –  than a typical central bank regulator does, but none about incentives as they face regulators and politicians (including that in extreme booms, an “insanity” can take hold almost everywhere, and even if there were a very cautious regulatory body, the head of such a body would struggle to be reappointed).

And nor is there any sense, anywhere in the article, as to when cautionary advice might, and might not, look sensible.  Alan Greenspan worried aloud about irrational exuberance years before the NASDAQ/tech bust –  someone heading his concerns then and staying out of the market subsequently would probably have ended up worse off than otherwise.   Much the same surely goes for housing.  In New Zealand, central bankers have been anguishing about house prices for decades.  Even if at some point in the next decade, New Zealand house prices fall 50 per cent and stay down –  the combination being exceedingly unlikely, based on historical experience of floating exchange rate countries, unless there is full scale land use deregulation –  that might not be much encouragement to someone who responded to Reserve Bank concerns 20 years ago.  (Oh, and repeated Reserve Bank stress tests suggest that even in a severe adverse economic shock of the sort that might trigger such a fall, our banks would come through in pretty good shape.)

The article concludes “housing market crashes are costly”.    Perhaps, but even that seems far too much of a reduced-form conclusion.  The misallocations of real resources that are associated with housing and credit booms are likely to be costly: misallocations generally are, and often it is the initial misallocation (rather than the inevitable sorting out process) that is the problem.  To me, it looks like an argument for avoiding policy choices that give rise to major misallocations (and all the associated spending) in the first place: be it fixed exchange rates (Nordics or Ireland), land use restrictions (New Zealand and other countries), or state-guided preferential lending (as in the United States).   Of the three classes, perhaps land use restrictions are most distortionary longer-term, and yet least prone to financial crises and corrections, since there are no market forces which eventually compel an adjustment.

It was a disappointing article on an important topic, sadly all too much in the spirit of a lot (but not all) of the Reserve Bank’s pronouncements on housing in recent years.

On housing, in late November, the Minister of Housing Phil Twyford commissioned an independent report on the New Zealand housing situation.   According to the Minister

“This report will provide an authoritative picture of the state of housing in New Zealand today, drawing on the best data available.

The report was to be done before Christmas and it is now 15 January.  Surely it is about time for it to be released?

25 thoughts on “The Reserve Bank and housing collapses

  1. Well,yes, I have no expectations that we’ll learn anything of substance from it, but…….that in itself will be telling. As I noted when it first announced, none of the people on the taskforce had any obvious sympathy with land use liberalisation, and it concerned me that their appointment was a sign that the govt wasn’t really serious about its occasional talk about serious reform in that area.


  2. Good article Michael. There is nothing there I would dispute.

    Wrt the housing report I note from the News that Shamubeel Eaqub’s wife Selena recently had a baby. So maybe baby duties have been interfering with report writing? Shamubeel of the writing trio being the most likely to have some expertise on reforming land-use regulations. I know that Selena was a co-author of the Eaqub’s book ‘Generation Rent’ -so baby duties is potentially putting two brains temporarily out of action.

    Michael my seasonal reading included the book -The color of Law by Richard Rothstein. It details the US government’s interference in the housing market/urban form from a race reconciliation perspective. I found it insightful.


  3. Also to add Michael. Behind the scenes I have talked to a number of people in Christchurch, Wellington and Auckland who are very excited about potential reforms for transport, housing and urban development in 2018. If nothing eventuates there will be a lot of disappointed people. But collectively that is not the expectation.


    • It certainly is firing up the NZD that has driven back to 0.73 against the USD. My European holiday got cheaper and cheaper as the new year passed over the summer holidays. As far as property values ae concerned there seems to be a tentative air about but still generally positive. Bit-coin seems to have dragged some discretionary investment dollars out of property but Bit-coin is looking decidedly rather to much more speculative and a few more of these $100 billion dollar drops could cause a collapse of confidence and then its back to property.


  4. Agree RE floating exchange rates.

    New Zealand has had a few housing slumps already, there is a reason that “house prices only go up”, because they do – at least nominally, inflation adjusted is a different story (see 1967-1980), and relative to GDP movements it is a completely different story.

    Every time since 1960 we have had housing market weakness, the NZD has been thrown under the bus, 1967 decimal event, 1985 float, 1999, 2007. The NZD does not lie, but we can all sit and pretend that our houses don’t go down, they do, and thats why the Kiwi is around 80% correlated to the property cycles, because when the prop market runs into trouble (and it does quite a lot) the Kiwi papers over the cracks in the property market for us as a nation. The average Joe does not care if the Kiwi is 70c or 35c, but he does care if you boot him out of his home.

    If we went to a fixed exchange rate, I suspect we would see much larger nominal declines in property prices.

    The worry is now, given the offshore debt load, a devaluation in the NZD would actually prompt a property price fall, which wouldn’t be good. 2008 changed a lot of variables for offshore capital flow, which NZ has been a large beneficiary of.


    • Sure prices go up and down. That’s the nature of markets, people taking opposing views of the direction of the market but as fundamental support is provided by a growing population and an older generation that persists in living longer and longer, downturns tend to be short followed by an even larger increase in property values. NZ Property does not get to be a trillion dollar asset by going down.


  5. Surprised you have had no comments for 5 hours. House prices is usually the most exciting of subjects for Kiwis.

    While generally agreeing with you that the very high house prices is almost evil [little chance of buying for my hard working and talented adult children] and also agreeing that the price is related to planning controls [so my Auckland house valuation is over 50% a rather spurious land valuation] I think you should point out that the issue is not universal in new Zealand. There are many places in New Zealand where a very pleasant house can be bought for a reasonable figure; the last time I looked at house prices in Oamaru and Taranaki there were places a teacher, plumber, policeman, welder, etc could afford and enjoy raising a family. Cycling the Otago Railway you pass abandoned empty houses for a days.

    Asking the government to stop the flow from country to city would be like getting Canute to hold back the tide but surely things can be done to just temper this population flow. For example why is the family housing benefit so biased in favour of the quality parts of Auckland?


    • Apologies for not commenting, but just back from Europe and just settling back into Auckland time zone. I continue to to my small part and help manage the wealth effect from increased property values that in the past would have lead to higher interest rates by ensuring that I spend overseas rather than in NZ.


      • Unfortunately learned my lesson well in 2007/2009 recession when the RBNZ drove a very buoyant NZ economy into a deep recession. I could not even contemplate that the RBNZ would engineer a recession on purpose due to people spending their property wealth in NZ. After that I decided that spending in NZ is a bad idea and would keep interest rates higher due to over spending in NZ because of its small economy and therefore capacity and resource constraints which results in keeping NZ interest rates too high. In the interest of NZ and of course to do my part to keep interest rates lower it is better for any new found wealth to be spent overseas. I learned this from the RBNZ gurus.


  6. Not sure about the rest of the country, but it is a glorious hot day in Wellington and time is surely better spent on the beach (from whence I’ve just returned).

    Do bear in mind that there is no net flow from the rest of NZ to Akld – altho it will be interesting to get this year’s Census data later in the year to confirm that that continues to be the case.

    Take your point about house prices in the rest of the country, altho even in many provincial cites price to income ratios are well above the 3 times ratio we find in many successful US cities. During my holiday i was checking out house prices in Whakatane and (my old home town of) Kawerau. Houses in the latter probably just about get down to around 3x income, but certainly not in Whakatane.


  7. Most interesting. Personally I tend to the view that restrictions on land use, bureaucracy , RMA and lack of competition in building supplies are major factors in housing costs. This is exacerbated by poor infrastructure. The time taken to permit development and Kiwi desire for tailored builds causes further problems.

    Liked by 1 person

    • I agree that that is the bulk of the NZ story. I guess my point, re the Rb article, is that one needs to look at each country’s case individually. Ireland has its own planning/land use restrictions, but in their case the boom and bust had a great deal to do with the huge economic/credit boom, in turn partly related to the deviation of interest rates from those domestic circumstances would have warranted.


      • Sorry should have made it clear that I accept your thesis, but see my points as additional significant factors


  8. Michael I think you are being a bit impatient. MP’s only have got back to parliament this week from the Christmas break. It will take a while to crank into action.

    I note though that the Minister of Transport, Housing and Urban Development -Phil Twyford tweeted this morning about a housing article of mine -saying;
    “How the growing international movement against restrictive zoning, and creative approaches to urban intensification, can help us make housing more affordable. Thanks @brendon_harre”

    Here is the link to the article
    View at

    This article is the start of a series of 3-4 articles which discusses urban land-use reform. It seems to me that the coalition government remains committed to a reform agenda in this area.


    • I’m pleased to see the tweet. I’ll be interested to see the report that was due by Christmas, and i remain uneasy about the signals implicit in the membership of the report group.

      As you know, much of my unease has been about (a) the lack of much indication from Little or Ardern that they take the land issue very seriously, and (b) the likely attitude of the Greens to serious reform in this area.

      Liked by 1 person

    • Phil Twyford would have to get past Auckland 2040 and Heritage NZ groupies who have the the legal firepower to stop the Labour government in their tracks. I still recall vividly the National’s government spouting that they are the government and can do what it takes to get the job done only to find out that the legal entanglements far too difficult to remove. Whatever they do will be cosmetic, likely more rhetoric against landlords and so called speculators and and will not resolve this lack of building capacity, capability and land restriction legality.


      • Ultimately Parliament, which the Coalition government has majority control over, has the legal firepower to blow Auckland 2040, Heritage NZ and other NIMBY groups out of the water, if it chooses to. Auckland 2040 is actually more bark than bite -their leader went on holiday rather than front up to the final Unitary Plan hearings.

        The question will be whether the Coalition has the political will to follow through with its promises. Currently I am betting they will.


      • After a 4 year process and a Unitary plan that is full of ridiculous compromises with 6 metre outlooks when most sites have only a 15 metre width makes it rather difficult to get sufficient density to take advantage of economies of scale and Viewshaft height restrictions that cover 40 million square metres of land in Auckland. I would say that the Auckland 2040 and the heritage groupies have done what they set out to do. They have won those crucial restrictions that makes development of scale rather difficult.


      • The problem with parliament is that they rely on experts and our experts clearly do not know too much because the independent hearings committee was supposed to have cleared the path with its panel of experts. Unfortunately the panel of experts did not get it right and did not fully understand the complexities of the land restrictions in play.


      • I can only speculate but the IHP panelists seemed to have certain biases wrt intensification -they were only interested in high rise apartments in a few places -which is what the UP allowed. The problem they had was they were putting all their eggs, in one building type, in a relatively few locations, it should have been obvious that cost escalation was a risk…..

        To mitigate against that risk, intensification needs be more widespread with a greater range of building types. Such as, low rise apartments, townhouses, terrace housing, Fonzi flats etc This will require some of the restrictions you mentioned GGS to be removed.

        The last government wanted to portray itself as competent economic managers when in reality they were scaredy-cats that didn’t want to change anything. There IHP system is another example of that -it appeared like they were doing something, when in reality nothing much changed.

        I know some very experienced business managers who are highly critical of Bill English for being weak in not effectively challenging the status quo ‘stasis’ of the National Party. They do not see him as the great policy wonk that the party likes to portray him as being.


      • I am not at all sure why you would bring up Bill English. He was the Finance Minister and he did an excellent job in the Finance portfolio managing 2 earthquake disasters and still able to keep to an eventual budget surplus. National moved an economy in a deep recession engineered by the RBNZ into a growing economy in record time.

        You should be looking at the compromises that the Independent Hearings Committee made up of independent experts has to make in order to get final approval on the Unitary Plan. A lot has to do with maintaining the unique beauty of the 57 sacred volcanos which required height restrictions on 40 million square metres of land. There is zero chance of Phil Twyford acting on this.

        The 6 metre outlook is to address concerns about building bland high rise rectangle boxes also the 50% site coverage. Therefore only 50% of any site is a build site the rest is just grass. On paper my otahuhu site zoned for 6 level apartments and terrace housing. At 700sqm of land. In theory I could build 40 apartments stacked boundary to boundary for 6 levels. But in reality I can perhaps just get 9 after considering the 6 m outlook and the 50% building site coverage. 40 apartments get economies of scale and cheaper apartments. 9 just results in expensive apartments.


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