I hadn’t paid much attention to the renewed wave of restrictive regulation of the housing finance market being imposed by the Governor of the Reserve Bank this year, but a journalist rang yesterday to talk about the latest proposal which prompted me to download and read the “consultative document” the Bank released last Friday.
Why the quote marks? Because quite evidently this is not about consultation at all, simply trying to do the bare minimum to jump through the legal hoops to allow the Governor to do whatever he wants. The document was released on Friday 3 September. The consultation period is a mere two weeks, which is bad enough. But then they tell people who might be inclined to submit that ‘we expect to release our final decision in late September’ – at most nine working days after submissions close – with the new rules to come into effect from 1 October. And if you were still in any doubt there is that line they love to use: “we expect banks to comply with the spirit of the new restrictions immediately”.
WIth that sort of urgency and disregard for any serious bow in the direction of consultation and reflection, you’d have to assume the Bank had a compelling case for urgent action, such that (for example) a delay of even as much as a month would pose an unendurable threat to the soundness and efficiency of the financial system (still the statutory purposes these regulatory powers are supposed to be exercised for). And since the Bank is quite open about the fact that the new restrictions will impede the efficiency of the system, you’d expect an overwhelming case for a soundness threat, complete with a careful analysis indicating that these new controls – directly affecting huge numbers of ordinary people – were the best, least inefficient, response.
But there is nothing of the sort. Instead they are actually at pains to stress that the financial system is sound at present, so the worry is about what might happen if things went on as they are. But that can’t possibly be an issue that rides on a one month, it must be something about several more years.
But even then their case amounts to very little. For example, they point that if house prices were to fall 20 per cent from current levels some $4 billion of lending would be to borrowers who would then have negative equity, But that is hardly news. The typical first-home buyer has always – at least in liberal financial systems – borrowed at least 80 per cent of the value of the home they are purchasing. It is usually sensible and rational for them to do so (indeed 90 per cent would often be sensible and prudent). So a fall of 20 per cent in house prices would always put a lot of recent borrowers into a negative equity position. Note, however, that (a) $4 billion is not much over 1 per cent of total housing lending, and (b) it is $4 billion of loans, not $4 billion of negative equity. If I borrowed 82 per cent of the value of the house, the house fell in value 20 per cent, and I lost my job and had to sell up, the loss to the bank might be not much more than 2 per cent of the loan.
More generally, in the entire document there appears to be not a single mention of the capital position of banks operating in New Zealand, or the Reserve Bank’s capital requirements. You might recall that New Zealand banks have some of the highest effective capital ratios anywhere in the advanced world, and that the Bank is putting in place a steady increase in those capital requirements. Moreover, if you read the Bank’s document – at least as a lay reader – you might miss entirely the point that the capital rules, and the internal models banks use, require more dollars of capital for higher risk loans than for lower risk loans. It is how the system is supposed to work. There are big buffers, those buffers are getting bigger (as per cent of risk-weighted assets), and the dollar amount of capital required rises automatically if banks are doing more higher-risk lending.
Of course, the Bank says a significant fall in house prices is more likely now. But we’ve heard that sort of line from every Reserve Bank Governor at one time or another over 30 years now. As it happens – and for what little it is worth – I happen to think house prices may be more likely to fall than to rise further over the next 12-18 months (even put a number consistent with that in the Roy Morgan survey when their pollster rang a few days ago), but I don’t back my hunch by using arbitrary regulatory restrictions that – on their own telling – will force many first home buyers back out of the market.
And it might all be more compelling if the Bank showed any sign of understanding the housing market. Thus, we are told (more or less correctly) that immigration is currently low (really negative) and lots of houses are being built. But, amazingly after all these years, there appears to be no substantive discussion of the land-use regulations and the land market more generally. Perhaps there will be something of a temporary “glut” in dwelling numbers – at current prices – but unless far-reaching changes are made to land-use rules that won’t change the basic regulatory underpinning for land prices. We know the government’s RMA reforms aren’t likely to help – may even worsen the situation – including because if these were credible reforms, the effect would be showing through in land prices now. And we know from the PM and Minister of Finance – and possibly the National Party too – that they don’t even want to do reforms that would materially lower house/land prices.
It all just has the feel of more action for action’s sake. Perhaps the government isn’t too keen on first-home buyers being squeezed out, but at least when they are criticised for not fixing the dysfunctional over-regulated housing/land market they can wave their hands and talk about all the things they and their agencies do, however ineffectual. As even the Bank notes, LVR restrictions don’t make much difference to prices for long. And if there is a compelling financial stability case, it isn’t made in this document – which, again, offers nothing remotely resembling a cost-benefit analysis for respondents to address. This despite bold – totally unsubstantiated – claims in the paper that their new controls would be beneficial for “medium-term economic performance”.
Then again, why would they bother with serious analysis when the whole thing is a faux-consultation anyway.
At which point in this post, I’m going to turn on a dime and come to the defence of both the Bank and the government. A couple of weeks ago the Listener magazine ran an impassioned piece by Arthur Grimes arguing that the amendment to the Reserve Bank Act in 2018 was a – perhaps even “the” – main factor in what had gone crazily wrong with house prices in the last few years. Conveniently, the article is now available on the Herald website where it sits under the heading “Government has caused housing crisis to become a catastrophe”.
Grimes was closely involved in the design of the 1989 Reserve Bank Act, and for a couple of years in the early 1990s was the Bank’s chief economist (and my boss). He left the Bank for some mix of private sector, research, and academic employment, but also spent some years on the Reserve Bank’s board – the largely toothless monitoring body that spent decades mostly providing cover for whoever was Governor. These days he is a professor of “wellbeing and public policy” at Victoria University.
However, whatever his credentials, his argument simply does not stack up, and given some of the valuable work he has done in the past, on land prices, it is remarkable that he is even making it.
There is quite a bit in the first half of the article that I totally agree with. High house prices are a public policy disaster and one which hurts most severely those at the bottom of the economic ladder, the young, the poor, the outsiders (including, disproportionately, Maori and Pacific populations). But then we get a story that house prices have been the outcome of the interaction between high net migration and housebuilding. As Arthur notes, immigration has hardly been a factor in the last 18 months (actually it has been negative, even if the SNZ 12/16 model has not yet caught up) and there has been quite a lot of housebuilding going on.
And yet in the entire article there is nothing – not a word – about the continuing pervasive land use restrictions (and only passing mention about the past). If new land on the fringes of our cities – often with very limited value in alternative uses – cannot easily be brought into development (if owners of such land are not competing with each other to be able to do so) there is no reason to suppose that even a temporary surge in building activity will make much difference to a sustainable price for house+land. Instead, any boost to demand will still just flow into higher prices.
Remarkably, in discussing the events of the last year there is also no mention of fiscal policy – the boost to demand that stems from a shift from a balanced budget just prior to Covid to one that, on Treasury’s own numbers, is a very large structural deficit this year.
Instead, on the Grimes telling the problem is a reversion to “Muldoonism” – not, note, the fiscal deficits, but the amendment to the statutory goal for the Reserve Bank’s monetary policy enacted almost three years ago now. Recall the new wording
The Bank, acting through the MPC, has the function of formulating a monetary policy directed to the economic objectives of—
(a) achieving and maintaining stability in the general level of prices over the medium term; and
(b) supporting maximum sustainable employment.
The main change being the addition of b).
Grimes has been staunchly opposed to that amendment from the start, but his assertion that it makes much difference to anything has never really stood up to close scrutiny. It has long had more of a sense about it of being aggrieved that a formulation he had been closely associated with had been changed.
He has never (at least that I’ve seen) engaged with (a) the Governor’s claim (which rings true to me) that the changed mandate had made no difference to how the Bank had set monetary policy during the Covid period, (b) the more generalised proposition (that the Governor is drawing on) that in the face of demand shocks a pure price stability mandate (and the RB’s was never pure) and an employment objective (or constraint) prompt exactly the same sort of policy response, or (c) the extent to which the New Zealand statutory goals remains (i) cleaner than those of many other advanced countries and yet (ii) substantially similar (as the respective central banks describe what they are doing) to the models in, notably, the United States and Australia. Similarly, he never engages with the straight inflation forecasts the Bank was publishing this time last year: if they believed those numbers, the purest of simple inflation targeting central banks would have been doing just what the RB did (and arguably more, given that the forecasts remained at/below the bottom of the target range for a protracted period).
Grimes seems to be running a line that the LSAP was the problem
The central culprit has been monetary policy that has flooded the economy with liquidity. This liquidity in turn has found its way into the housing market.
But there is just no credible story or data that backs up those claims. Banks simply weren’t (and aren’t) constrained by “liquidity”. The LSAP was financially risky performative display, but it made no material difference to any macro outcomes that matter, including house prices.
There is quite a lot of this sort of stuff.
Grimes ends on a better note, lamenting the refusal of governments – past and present – to contemplate substantially lower house prices, let alone take the steps that would bring them about (his final line “And no politician seems to care enough to do anything about it” is one I totally endorse). But in trying to argue a case that a change to the Reserve Bank Act – that had no impact on anything discernible as it went through Parliament or in its first year on the books – somehow explains our house price outcomes (especially in a world where many similar price rises are occurring, and where there was no change in central bank legislation), seems unsupported, and ends up largely serving the interests of the government, by distracting attention from the thing – land use deregulation – that really would make a marked difference and which the government absolutely refuses to do anything much about.
croaking cassandra 
Yet another builder friend was rejoicing his retirement and release from the insane building bureaucracy a couple of weeks ago. Politicians and bureaucrats who have never built anything in their lives will just continue to make things worse.
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Thanks Michael,
And there you have it. Simply, lower the market value of housing and the banks don’t ‘wear much loss’.
I have been in those banks, and there are so many creative ways to change Asset Management or Impacted / Non-Performing Loans into performing loans. No real problem.
However the policy decision of actively reducing the market is near IMPOSSIBLE for any government to undertake. Can you imagine the combined forces of property owners taking a 20% loss where the Government then confirmed it forced that loss to occur. Ridiculous! It would be 1989-92 all over again, but with one person to blame!
That sid I agree the underlying value of development land is actually a finite issue that the government can afford to get offside with one type of investor – bare land / green field subdivision! One could even suggest that RMA (and replacement) directives instead support an ease of subdivision, with pricing controls on the maximum. The last thing we want is green belt land rezoned into residential as it will simply then be worth the same and cost the same to the market.
We need a form of govt / council led or supported developer to take green belt low value land and develop without the margin / value increase. It is truly a hard problem to resolve and not merely fiscal.
Perhaps a develop fund at low rates with corresponding reduced margins on the developer may encourage some – actually low risk may bring many out to consider.
But frankly there is NO control that the electorate would tolerate, except reduced year on year housing price inflation.
Regards,
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It’s not control that is required but freedom. But that’s not going to happen because too many people are benefiting from the lack of it and those who don’t are politically powerless and voiceless.
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To complete the circle, Ashley Church had this on OneRoof quoting Arthur about a managed crash some years ago: https://www.oneroof.co.nz/news/ashley-church-would-a-managed-crash-in-house-prices-help-the-housing-market-40082
One of his points is that housing affordability is not materially different to what its always been because its all about servicing cost to income not house price to income, so lower interest rates means higher house prices. I don’t buy it but it’d be good to get your perspective on it Michael. (You’ve probably covered it an earlier post?)
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Probably relevant. In a well-functioning market house prices shouldn’t be much affected by interest rates. Getting into a house, or renting one, would be easier than ever. In a well-functioning market….
https://croakingcassandra.com/2019/10/10/rents-should-have-been-falling/
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Michael is completely right – its land regulation. Prices will not fall because of a minor temporary surge in building. We only build 35K dwellings per annum or so with 2M existing. So if think a building boom is making a difference good luck. Rents have risen sharply as well – 26% in Chch in the last year. It is ridiculous to continue demand side measures. All the regs on rents have gone straight into rises.
Simple things govt can do tomorrow
1. Derelict property and all empty sections – if held for more than 12 months these are land banks – rate them for a new fully developed property – this will push them on to the market and into the hands of developers. Land bankers hate running costs. This is a retrospective law that can hit any empty section owner instantly. There are large investments in land of this nature
2. Subdivision – LINZ should allow subdivision down to 100 sqm of any land anywhere in NZ. Access 1.2 metres wide and no offstreet parking regs. No questions asked.
3. Heritage neighbourhoods. Protect these by placing an order on the building not the land. Job done.
4. Compel councils to allow infill housing in city boundaries when it does not compromise height planes. ie fill up the 100sqm LINZ sections
5. Write a law that forces councils to have not less than 15% of city area zoned for subdivision.
6. Zone all lifestyle properties (read uneconomic farm units for wealthy to ride range rover and pony) residential at 100sqm.
Result falling prices.
How likely is this – forget it. Hence it is safe to keep investing in housing
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Oh and the $100K in GST levied on every new dwelling/land – allocate all this money to councils to build the supporting infrastructure. Central govt cry poor young family yet they add $100K in GST to evry new build mortgagee
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2. Subdivision – LINZ should allow subdivision down to 100 sqm of any land anywhere in NZ. Access 1.2 metres wide and no offstreet parking regs.
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They have them in Brazil. Favelas is the name I believe.
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Yes well lets just keep it at quarter acre then – The problem is though where will all the 1m wage slaves we added by migration recently live? We baby boomers need these so that we can retire on our real estate assets and keep sucking blood from the population via NZ super.
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The whole purpose of the ‘maximum employment’ criteria is to simply act as a flag for the Bank, to give them pause for reflection, and to hopefully prevent them from making the mistakes they made in hiking rates in 2010 and in 2014 when the economy was operating well below potential and the labour market clearly had ample slack. That was the core of the argument I made for the dual mandate, and one that Grant Robertson agreed with.
I agree with both Michael and the Bank that it has had precious little impact on bank policy in the past 18 months.
If the Bank is to blame for any policy decisions that fuelled the surge in house prices, it was the suspension of the LVR constraints – which led to a surge in investor lending – and the mortgage holiday. Taken together, alongside the sudden recovery (which no one really foresaw) it created the impression that housing was a one-way bet. Hence, while immigration has stalled and supply is catching up to demand, we’ve seen a sellers strike with new listings failing to keep up with sales leading to a collapse in days to sell and the run-up in prices.
But more broadly, the housing crisis is one that’s been developing since the mid-1990’s and the last 18 months is only a continuation of this trend.
I’m probably more inclined to support tighter credit conditions than you Michael, but the evidence is clear that the housing crisis can’t be solved by the RBNZ. what’s needed is real political will to institute supply-side changes. I don’t see that happening any time soon.
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It is somewhat surprising Arthur Grimes would focus on the dual mandate.
When the RBNZ commenced inflation targeting, it made sense to have only one goal (price stability) and a conservative central banker to run monetary policy (Don) as this was perceived to result in the strongest credible commitment to getting inflation down, and keeping it down. Thus lowering the sacrifice ratio (less output loss per unit of inflation decline). Even with that, we still had a cracker of a recession in ’91.
But the RBNZ had moved to flexible inflation forecast targeting some time ago (in the late 1990’s with the advent of the new FPS model, which incorporated an output gap framework in its policy reaction function) hence Adrian’s comment that the dual mandate doesn’t really change the Bank’s thinking on policy. Changing the Policy Target to price stability and maximum employment simply reflects a continuation of a move towards flexible inflation targeting and it’s what the Bank would have recommended back in 1989 if it had credibility.
I am happy to say that I proposed to Grant the change in the RBNZ target to include maximum employment and I did so in response to the behaviour of Graham Wheeler. It was obvious to anyone with half a brain that inflation in New Zealand was in abeyance, that inflation expectations were well anchored, and that there was really no need for the Bank to embark on a substantial tightening of monetary policy in 2014 (a point I wrote in an Op-Ed on interest.co.nz at the time) but he bulldozed it through anyway. By changing the mandate to include maximum employment, it forces the Bank to devote considerable time and energy to examining the labour market, to understand how much real capacity pressure there is (rather than just using things like Kalman filters on GDP) and, most importantly, to explain how the economy is at maximum employment. If policy is operating as it should, it won’t have any impact on bank policymaking. But if the Bank wishes to embark on a policy that’s contrary to maximum employment, then it needs to justify its actions. Hence, it acts as a strong check and balance in the system. Would it have stopped Graham? Possibly not. But it would have given the Bank pause for reflection and made it more challenging.
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Thanks Peter. I’ve always mean sceptical of the story that the Bank was ever anything like a strict inflation targeter. It is convenient rhetoric for many, and it is certainly true that articulations change over time, but the whole way the targeting framework was set up, all the way back to 1990, was quite consistent with a flexible inflation targeting approach (and was, in practice, mostly run as such).
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Peter, I think you take too much credit for the inclusion of maximum sustainable employment. The entire thinking around maximum sustainable employment arose much earlier when Labour was in opposition when Alan Bollard engineered what was a perfectly growing NZ economy into a disastrous recession with massive loss of jobs driving up interest rates to 10% on residential Overdraft, 12% for commercial loans, 15% for development loans which decimated an entire building industry, which lead to the demise of 61 Finance companies involved in development financing.
What I liked about Graeme Wheeler was his quick reversal when he realised he had made a mistake. Alan Bollard went bonkers driving out inflation to the extent of seriously damaging the NZ economy and what saved the day was when Alan Bollard blind as a bat actually came to realise hat there was actually a GFC raging all over the world while he was busy tightening the screws in NZ and finally made the decision to drop interest rates.
Personally I burned through $400k in backup overdraft facility just to pay the higher and higher interest rates. I was down to my knees with only $100k left from $500k backup overdraft facility before the relief came from interest rates falling.
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New Zealand has created more economic bubbles than a children’s party.
Successive housing markets plus many others ( ostrich eggs deer etc ) and now to top the pile speculation in carbon credits.
Refer Keith Woodford.
Big investors now speculating in carbon credits looks likely to overstress yet another NZ market.
This market is not well known and the credits hard to define but the ETS is the heart of the New Zealand climate change response.
The damage will be real!
Never mind NZ is good at boom and bust.We have had plenty of practice.
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A higher ETS price is consistent with the govt’s net zero goal. The speculation seems to arise because the govt says the carbon price will rise in future, but not yet. In a v low interest rate environment that just looks like gifting money to people who are energetic enough to take advantage.
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This Government are making a similar mistake to the Australian PM who, during a World War announced rationing spme days before implementation.
The non surprising result was a huge buy up by the populace.
That PM blamed it all on Mother’s Day!
The Government guaranteed increases in the price of carbon credits means inevitable speculation from any investors.
I wonder what Arderns excuse will be?
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MHR comment: somehow I accidentally deleted the original of this comment
Peter Ledingham commented on Housing
I hadn’t paid much attention to the renewed wave of restrictive regulation of the housing finance market being imposed by the …
I very much agree with the thrust of Arthur’s commentary
I don’t blame the RBNZ for the structural forces that have driven house prices sky high
But I do blame them – as I have said on this blog before – for throwing a lot of petrol on the flames. And this in a context where ultra sloppy monetary policy has done nothing to boost the economy or employment. Interest rates have been irrelevant to real economic decisionmaking for some time, and it is only asset prices that have been affected.
The social costs of this blundering could last a generation or more.
In the meantime the Bank devotes its energy to glacial fiddling with loan restrictions etc. while Rome burns…
View Comment T
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I suppose my question Peter is which bit of Arthur’s argument are you endorsing. It is easy to say that too much monetary (or fiscal) stimulus was provided, at least when looked at with hindsight, but the Bank’s inflation forecasts a year ago were extremely low, and would have supported at least as much easing as they had done. Those forecasts were wrong, but it was a forecasting mistake. Arthur claims that the change in statutory objective created the (housing) problem but there is no obvious reason to think the forecasts would have been any different with the 1990-2018 objective than with the current one.
Or again, you are arguing that interest rates aren’t affecting real economic activity. The Bank disagrees (so do I, including by noting the exch rate channel) but there is no sign the Bank’s view on that has changed, so how can the change in statutory mandate be the problem (as Arthur strongly asserts)?
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Mr Ledingham and Mr Grimes.comments re fueling inflation seem sensible .That inflation has been exported from China is another recent Economist story,
My earlier post reveals capital flows looking for a home in housing and elsewhere.Pandora’s box is open.
The fact remains that the RB got their inflation forecasts wrong as you say.
This should not have happened and most likely would not have, were there not changes to soften the PTA.
I think that is the point.
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But there is no evidence for the proposition that the Bank’s forecasts would have been different if the statutory goal had been as it was pre-2018. After all, not only did the Bank have v low inflation forecasts, it also had v high unemployment forecasts.
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The sentences of Arthur’s that I strongly agreed with were: “The central culprit has been monetary policy that has flooded the economy with liquidity. This liquidity in turn has found its way into the housing market.”
This could be due to the change in the mandate. I am not a fan of having employment in the objective function, because it muddies the waters. I cannot say whether or not the change has had an actual impact on RBNZ decisionmaking (I suppose it should have), but it has at least blunted the accountability on inflation outcomes. [For the record, I also think that the current midpoint of the inflation target at 2% is too high. Call me reactionary!]
The other possible cause is execution. I have to be agnostic about the first half of last year. The situation was pretty unprecedented, and the Bank needed to respond to the pandemic/lockdown. However I would not personally have felt the need to adopt the recent international fashion for balance sheet machinations as supplementary instruments. And I would not have expected inflation to remain low since costs were ballooning everywhere.
But a year ago the writing should have been on the wall that it was time to neutralise or reverse the easing policies.. Inflation was on the way up, and the economy was much healthier than had been expected.
But here we are – a year on – and nothing much has changed. The Bank has unaccountably been sitting on its hands with respect to its primary monetary policy instruments, and fiddling rather lamely with prudential controls instead. The balance sheet injections continue!
Housing prices are a corollary of all of this, but did provide a clear indicator that there has been too much money about. Sadly the consequences will not be easily fixed.
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Somewhat related given the ‘debt trap’ idea within, was wondering if you had any thoughts on the below speech? (if seen) Find it interesting the central bank banker isn’t sold on the idea of a natural rate of interest…..even though most central bankers cling to this variable…!
https://www.bis.org/speeches/sp210902a.htm
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I’m hoping to write a post about it next week. A couple of initial comments in this thread. In addition, it strikes me as putting an incredibly high weight on what cen banks can do (much as Borio may not like low cen bank policy rates, 30 year bond rates suggest the market believes fairly low rates will be warranted for a long time, well past the terms of this generation of cen bankers.
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It sounds like the Reserve Bank’s decision (when made) will be ripe for judicial review. The problem is that first home buyers don’t have any money to fund the case, and the banks know it’s best not to rock the boat with the regulators. Bank economists and CEOs sound more and more like the Government messaging machine, so they probably won’t make much of a peep.
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