The Finance Minister’s letter to the Reserve Bank yesterday about rising house prices is just a part of what is a much wider Government quest to find answers to the price rises.
Other proposals are also being considered.
The new urgency in the Beehive about the housing market appears to have been further provoked by commentary such as that from Westpac on Monday who are forecasting 15 per cent growth in the housing market next year, and they are blaming interest rates.
“interest rates matter more for the housing market than physical factors like population growth or housing supply,” their economics team said.
“In fact, in recent months net migration has effectively fallen to zero, and booming construction activity is adding to supply. Even so, house prices have continued to charge higher.
“With the domestic economy continuing to firm and interest rates set to remain low for some time yet, we’ve again revised up our forecast for house prices. We now expect that annual house price growth will peak at 15% in mid-2021.”
That is why Finance Minister Grant Robertson is not only writing to the Bank but also has Treasury working on a range of responses to try and tame the housing market.
POLITIK understands these could focus on a crackdown on property investors, including extending the Brightline test out beyond five years and possibly ending the tax-deductibility of interest on investment property mortgages.
At the same time, the Prime Minister has signalled that the Government is considering assistance for first home buyers.
And in the background, POLITIK understands that Housing Minister Megan Woods met with Shamubeel Equub after his speech at the InfrastructureNZ conference last week saying the crisis had now become too big; that we could not wait any longer for action.
Robertson has now begun work on what looks like either a housing package or series of measures which could start to appear in February next year.
But yesterday we saw tangible action from him with a letter to Reserve Bank Governor, Adrian Orr.
Both Opposition parties, National and ACT, have been arguing that the Bank needed to take more responsibility for the rise in house prices.
ACT Leader, David Seymour, has called for asset prices like houses to be included in the inflation measures used to set the Official Cash Rate while National Treasury spokesperson, Andrew Bayly, has proposed that the Bank direct its Funding for Lening programme away from housing towards business, farm and property development lending.
Robertson’s letter says he is concerned that the recent rapid escalation in housing prices, and forecasts for this to continue, are affecting the Government’s ability to meet the economic objective set out in the Remit.
“The Remit” was addressed to the Bank by Robertson last year and included a requirement that the Bank “improve the wellbeing and living standards of New Zealanders through a sustainable, productive and inclusive economy.”
In his letter, Robertson goes on to say: “I am also concerned about the potential that these price increases may present a financial stability risk to the economy, particularly when monetary policy returns to more normal settings.
“Housing price instability is harmful to our aims of reduced inequality and poverty and is also likely to negatively impact the Government’s aim of creating a more productive and inclusive economy.
“This is particularly the case where investments in the economy are increasingly being made in the existing housing stock, rather than in other more productive assets.”
Investors are now the biggest buyers on the New Zealand home property market.
Core Logic research for the year up to September 30 shows that investors had a 26% share of purchases in the third quarter, the highest figure since 28% in the third quarter in 2016, (just prior to the introduction of the 40% deposit requirement by the Reserve Bank).
“In addition, the rise in market share for mortgaged investors isn’t just because they’ve ‘held on’ while other buyer groups have made fewer purchases – in fact, the number of deals done by mortgaged investors in the third quarter was more than 20% higher than a year ago,” said Core Logic’s Kelvin Davidson.
“Their activity levels were already rising pre-Covid, but this trend has just been reinforced in the past six months by reduced interest rates and the temporary removal of the Loan to Value ratio(LVR) rules.”
Those rules are on their way back with the Reserve Bank “consulting” with the trading banks about re-introducing them early next year.
Four banks, the ANZ, ASB, Westpac and the BNZ, have already begun imposing LVR ratios themselves.
However, the Reserve Bank is proposing to roll out a $28 billion “Funding for Lending” programme to provide finance for the trading banks to on-lend at 0.25 per cent interest.
There is a widespread fear that this money will go into the housing market at even lower than current interest rates, and further fuel house price rises.
This has been what Bayly has focussed on with his proposal that the Government direct the Reserve Bank to steer the money away from existing housing.
And Robertson appears to be halfway to doing that.
“One option I would be interested in your views on is changing Section 2b of the February Remit to better highlight that the Monetary Policy Committee (MPC) takes house prices into consideration when formulating monetary policy to help achieve the Government’s objectives,” he says in his letter.
He suggests that the Committee should have regard to the efficiency and soundness of the financial system; that it seeks to avoid unnecessary instability in output, interest rates, the exchange rate, and that it discount events that have only transitory effects on inflation, setting policy with a medium-term orientation.”
The often blunt-spoken Reserve Bank Governor, Adrian Orr, was uncharacteristically polite in his response to Robertson.
“We will consider your suggestion of how the Monetary Policy Committee (MPC) could further take into account house prices when formulating monetary policy and will respond with considered feedback in due course,” he wrote in a reply late this afternoon to Robertson’s letter.
But he then went on the defensive.
“ I can assure you that the MPC, in making its decisions, gives consideration to the potential impact of monetary policy on asset prices, including house prices,” he said.
“ These are important transmission channels that affect employment and inflation.
“Housing market-related prices are also included in the Consumer Price Index, for example, rents, rates, construction costs, and housing transaction costs.
“Higher-risk lending for housing purposes is also an important consideration for financial stability.
“We have, for many years, identified the risk that highly-indebted households and businesses could pose to the financial system.
“This concern is why we recently signalled our intention to reinstate loan-to-value ratio restrictions for higher risk lenders, in particular, property investors.”
But Robertson is making it clear that the letter to the Reserve Bank is only a part of the Government’s response.
In the press statement accompanying the letter, he said the Government’s focus was on improving access to the housing market for first home buyers and ensuring house price growth did not distort the effectiveness of the overall economic rebuild –“ which we want focussed on the productive side of the economy.”
“We have been clear about the policy responses that we are not prepared to consider, but there are other options that need to be investigated,” he said.
That is what will now happen; Treasury will be looking at a wide range of possible responses to bring the market back under control.
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