Late on Friday afternoon I saw a tweet from Stuff politics and economics journalist Thomas Coughlan linking to a new and substantive article he’d written under the headline “Reserve Bank repeatedly warned Government money printing would lead to house price inflation”. Several other journalists who’ve each had a bee in their bonnet about the Reserve Bank’s asset purchase programme weighed in in support. None of them is too keen on Grant Robertson, and so it was presented as if they’d found evidence that the Minister of Finance had spent the year ignoring things that were not only totally predictable, but of which he had been advised by his officials. The Bank knew (we are told), as did The Treasury, but Robertson fiddled while Rome burned. Or so the story goes.
Now I yield to no one in my distaste for this government’s 3.5 years of appalling indifference to the unnatural disaster that is New Zealand house prices. But on a first glance the Stuff story didn’t seem very plausible – even noting that Coughlan was drawing on papers he seems to have obtained from The Treasury (and which, to his credit, he provided links to). However, it was Friday afternoon and my appetite for chasing these things down isn’t what it once was. So it wasn’t until yesterday that I read carefully the article, and the official papers Coughlan cited.
Coughlan links to three official papers. The first of these is a joint paper from the Reserve Bank and The Treasury dated 29 January 2020 addressed to the Minister of Finance on “Institutional Arrangements for Unconventional Monetary Policy”. I’d be surprised if the Minister paid much attention to it at all, for several reasons:
- it was more than 20 pages long,
- it was signed out by two fairly junior people (one on each side of the street), and
- all it asked was for the Minister to agree that officials keep working on the issues (not the substance of so-called unconventional monetary policy, but “institutional arrangements” for something officials explicitly say is a low probability event any time in the following two years). The intention at the time was a report back by the end of July.
But even if the Minister had read, marked, and inwardly digested the full report, what else would he have found?
Coughlan notes that the report says that “as these tools have never been used in New Zealand before, the magnitude of the macroeconomic stabilisation benefits is highly uncertain”. Well, indeed. But what of it? In fact, at least one of the tools on the list has never been used anywhere, so it is hardly surprising no one could be confident what effect it might have. It is the sort of boilerplate statement that, in a report of this sort, any reader will quickly pass over.
Then we learn that “although UMP tools entail many of the same trade-offs as conventional monetary policy, the scale of the tradeoffs can be larger with UMP. The trade-offs include fiscal risks, financial stability risks, distributional impacts, and the impact on financial market functioning”. Not that the operative word is “can”, and the list of “tradeoffs” is still very generic. However, officials refer to a Figure A. In this table the orange-coloured items are “the more significant trade-offs”, and this box (below) is about the class of tools labelled “Large scale asset purchases, including domestic government bonds, foreign currency or foreign government bonds, and corporate bonds.
- there is no mention of house prices at all
- the observation is about what “may” happen, not what will happen
- a reasonable reader might reasonably suppose that officials were talking mainly about bidding up the price of assets the central bank was purchasing in such operations – the most obvious “more directly” effect, since conventional monetary policy doesn’t work by buying assets outright but by setting an overnight deposit rate.
And that is about it in the body of a 20+ page document. There is, however, an Annex about specific possible tools. Do Ministers read Annexes at the end of 20 page documents? Not often is my guess, especially when all this is about hypotheticals (so officials were telling the Minister), and when the paper is about institutional arrangements not details of tools. But had he got that far here is what the Minister would have learned from his officials about asset purchase programmes.
Not only is there is no reference to house prices at all, but officials explicitly tell the Minister that in a New Zealand context a lower exchange rate is likely to be the main transmission channel.
So that was the 29 January paper. One might reasonably criticise both officials and the Minister for the lack of urgency by then (Wuhan was in lockdown, the Ministry of Health had deemed the coronavirus a serious issue, and the NZ government was days away from stopping arrivals from China…….oh, and the Bank/Treasury had had 10 years to prepare for a crisis in which the OCR hit zero) but one could hardly say Grant Robertson was now fixed with knowledge that if monetary policy was eased in the next downturn house prices would go crazy. No one was proposing the Reserve Bank buy houses, and house prices weren’t even mentioned.
The next document Coughlan cites is a short aide memoire from The Treasury dated 9 March 2020, prompted by the speech the Governor was to give the next day on unconventional monetary policy. It is titled “Update on work on institutional arrangements for unconventional monetary policy”. There is no analytical substance in the note at all (nor would one expect there to be). It does note that the risks of needing unconventional tools at some point had increased due to Covid-19, but there was no sense of urgency, and officials simply noted that they were bringing forward the report-back date for some bits of the institutional arrangements work to the end of May. I count that as pretty damning – this was, after all, only a week before the MPC (with the Secretary to the Treasury sitting on it) finally confronted reality and cut the OCR sharply, and instituted a floor (OCR at 25 basis points) that not even Treasury seems to have envisaged, but none of this has anything to do with house prices, distributional effects, or the like.
The third paper is dated 16 March and is an aide memoire from The Treasury on large scale asset purchases, the MPC having announced that morning that the LSAP would be next cab off the rank if the Bank considered more policy support was needed (note that the Minister’s own Covid-response package was to be announced on 17 March). Unsurprisingly perhaps, there isn’t anything new in this note either. House prices, for example, are not mentioned at all. There is something similar to the bit from the January paper about how the portfolio rebalancing channel might “push up the price of a range of assets, helping to flatten yield curves” – a phrasing that clearly has in mind simply bidding up long-term bond prices – and a repeat of the point that the exchange rate effect might be particularly strong in New Zealand. (At this point, Treasury still doesn’t seem to have envisaged that the government would be issuing so many new bonds that total private holdings might not drop much, if at all.)
And a little later there is the repeat of the distribution line: “LSAPs have many of the same distributional impacts as conventional monetary policy, but can raise asset prices more directly than conventional monetary policy, creating wealth inequality. However, they can also mitigate inequality by supporting employment.”. One might challenge some of the Treasury’s economics, but there is no reason in any of this to think (or for the Minister to think) that they were referring to anything other than the direct effects on prices of assets the Bank itself might purchase. And no one was suggesting houses for that list.
And that is it. That is the set of documents Coughlan claims show that the Minister of Finance was repeatedly warned that asset purchases would send house prices further into the stratosphere. It seems like very slim pickings to me.
Of course, we don’t know what the Secretary to the Treasury and the Governor may have said to the Minister in their private conversations with him. But we do know quite a lot about the Bank was saying in public.
For example, there was that long speech (19 pages) that the Governor delivered on 10 March – when he was also doing everything possible to play down any sense that monetary policy might need to do anything soon. It was sold as some sort of framework for thinking about monetary policy issues and options when the OCR had got to, or very near, zero.
The Governor tells us about a BIS assessment of other countries’ asset purchase programmes
and something of the Bank’s own thinking (emphasis added)
and then something that looks a bit more directly relevant
But note that (a) here he refers to both low global interest rates and unconventional monetary policy, not just the latter, and (b) Figure 5 actually shows that house prices (and share prices) in New Zealand had increased more in New Zealand over the last decade than in advanced countries as a group (many of which had used asset purchase programmes).
The very next paragraph reads as follows
Not exactly some sort of smoking gun, and certainly no sense that the Bank thought that launching an LSAP early in a severe downturn would send house prices further into the stratosphere.
In fact, the Governor helpfully included this chart showing how the Bank thought the transmission mechanism would work
It is quite a complicated chart but note that (a) there is no channel to house prices that is different from the way they thought normal monetary policy works (ie through lower interest rates) and (b) the only separate channel they highlight in regard to an LSAP tool is the exchange rate.
On the final page of his long speech the Governor wraps up this way (again, emphasis added)
The Governor had his bases covered with a long list of issues, but note that even that final warning is (a) not specific to an LSAP tool, (b) never – as with the rest of the speech – mentions house prices, and (c) seems to be talking about prolonged period effects, not those in the first few months after an intervention.
Quite possibly the Minister of Finance didn’t read this speech either, but had he done so he’d still not have been fixed with the sort of knowledge, and implied guilt, Coughlan claims.
One could go on. One could look back to the Bank’s significant Bulletin article in 2018 on monetary policy options. It was a careful survey of some of the issues and overseas experience, but on skimming through it again I didn’t see references to house prices. Or the Governor’s substantial Newsroom interview in late 2019 – the one in which he expressed a distinct preference for a negative OCR over LSAP-type tools – where there was also no reference to house prices.
Or, since Coughlan claims the Minister was fixed with knowledge and that the Bank had clearly advised him, we could look at the Bank’s own Monetary Policy Statements last year. In May, for example. when it was still early days, but when the LSAP had been deployed and the OCR been cut, the Bank’s baseline scenario was that house prices would fall by 9 per cent over the rest of 2020. In August, several months on, they noted that “accommodative monetary policy is supporting household spending by limiting house price declines”. They weren’t telling the Minister of Finance the LSAP would cause house prices to explode because…..that wasn’t their view, and at most they thought all their interventions were limiting house price falls (as one would expect – see transmission mechanism chart above – with conventional stabilisation monetary policy).
One could go on. There are other telling quotes from the Governor and other senior officials – although of course never from external MPC members who exist, if at all, in some sort of purdah – and the actions of the Bank (eg suspending LVR restrictions) or the rolling out of stress test guesstimates based on falling house prices.
There is simply nothing in the paper trail to suggest that the Bank (in particular, but probably Treasury too) was vigorously highlighting to the Minister of Finance that if they were let loose with the LSAP tool house prices would starting rocketing upwards again. They just weren’t. (And for what it is worth, the Bank’s survey of expectations – mostly of economists – through last year consistently had house price inflation expectations at or below the expectations that existed at the start of last year.)
Now it is of course true that house prices have gone crazy again (yesterday a real estate agent put a brochure in our letterbox telling us of this little Island Bay house – 112 square metres of house, 259 square metres of section, no view – that just sold for $1.4 million). In a better world – more knowledge, more good analysis – our officials and economists would have anticipated such an outcome. But they (well, we) didn’t. Speaking only for myself, I expected that as in most recessions we would see a fall in house prices that wouldn’t last that long, or be that deep, but might take a few years to reverse. After all, in typical recessions (a) interest rates fall, often more than they did in 2020), (b) bank lending standards often tighten (as the survey suggested they did last year), and in this downturn the net inflow of migrants was also likely to be disrupted.
There are people – on both the left (including the journalists I mentioned earlier) and on the right – who want ascribe a lot of the blame (the different than normal outcome) to the LSAP. There is much use of the loose, and not very accurate, term “money printing”. In this lecture late last year I told my story on why I’m convinced that what is little more than a large scale asset swap (two very similar assets, differing only by maturity date) is not having much macro effect at all. And I echo the Reserve Bank’s own repeated view that to the extent the LSAP works it does so by lowering interest rates, and the fall in interest rates in not unduly large, or larger than the Bank’s own published forecasts repeatedly suggested was needed for macro-stabilisation purposes.
I’m not that confident of my own story, but for now it would emphasise macroeconomic forecasting errors. To date, and for reasons that still aren’t clear, the economic rebound has been much sharper than any forecaster – but notably the RB and the Treasury – expected. Perhaps that will last, or perhaps not, but for as long as it does, in an environment where governments keep land artificially scarce, people are more likely to be willing to bid house prices to even more outlandish levels than would have seem plausible when the Bank and Treasury were advising the Minister in the first half of last year of the likelihood that the Covid downturn would be quite deep and quite enduring.
(Of course, adding further distortions to the once-functional market for housing finance, pursuing political agendas more than hardheaded assessments of risk as with the RB’s new LVR controls announced today, can dampen some of those house price pressures for a time. But the solution to the house price debacle still lies where it always did, with the central and local governments that continue to make land for development artificially scarce in a land-abundant country. Blaming the Reserve Bank, blaming the banks, blaming the tax system, or blaming anything else is really just distraction.)