Reserve Bank Governor Adrian Orr believes the Government’s most recent instructions to the Bank may mean it could “nudge” house prices down “a bit.”
However, he is promising the Government that some of the advice he will give on the housing market might be uncomfortable.
And he hinted that that advice would include views on taxation, which would almost certainly have to discuss a capital gains tax.
But Finance Minister Grant Robertson has literally asked for it.
He has made changes to the Bank’s Monetary Policy Committee’s remit requiring it to take into account government policy relating to more sustainable house prices while working towards its objectives.
Robertson has aksed for specific advice from the Bank on debt-to-income ratios and interest-only mortgages.
However, Orr told the University of Waikato New Zealand Economics Forum yesterday that the concept of “sustainable house prices” required a concept of fair value.
An investor needed someone to live in a house they owned.
“If the yield is the rent and the rent has to keep going up and up and up, eventually the house is going to be empty and d what’s going to happen to the price?” he said.
“What instruments would we have that may be able to impact house prices and nudge them towards something that we consider sustainable?”
He said that the Bank might keep to loan to value restriction on permanently.
“We might have some small but positive restriction on all of the time just to make sure that people have to stump up and put skin in the game, to begin with, with a deposit on their house so that they’re not over-leveraged,” he said.
He said the Bank was going to have to do a lot of work to understand fair value.
“That is going to unveil a lot of policy settings that explain why we are so heavily invested in housing in New Zealand, not just as dwellers but as an investor, he said.
“And some of those settings are going to come down to uncomfortable facts like access to leverage the structure of the banking sector, the favourability of some loans versus others, and (pause) taxation — I said it.”
Answering a question about risks in the economy, Orr said that there was “absolutely a question mark around house prices globally and in Aotearoa New Zealand, relative to household earnings.”
“And I would say the number one way in which a lot of this risk ends up being highly concentrated in housing in New Zealand is the ability to leverage that asset compared to other investments.
“The fact that we can turn up with a 20 per cent deposit and get a five to one leverage, that just seems a no brainer to everyone.
“But leverage is a significant risk.”
All of this suggests that investment housing is going to be a major focus of the work the Bank does on sustainable housing values.
“Our number one nervousness right here, right today was around the very high-risk lending, the high debt lending in particular to investors because they’re the ones who can most trigger house price variability,” he said.
“It is much easier to enter and exit a home as an owner if you are not also the dweller.
“This isn’t a bash on the investors.
“The investors play important equilibrium parts of the market.”
Orr ad-libbed during his appearance in Hamilton, but the Bank published a full script for his speech on its website, and one bit he didn’t read out said that recent studies had identified housing supply as the most significant determinant of house prices in New Zealand.
And it introduced a note of scepticism into how much working on the demand side would impact prices.
“Increasing or suppressing housing demand generally only has a temporary impact on house prices and affordability,” it said.
But if Orr was hoping the building industry might come to his aid by suddenly increasing the supply of houses, the conference heard from the chair of the Infrastructure Commission, Dr Alan Bollard, that the construction industry had its own problems.
“We’re hearing about a very tightly wound house construction sector that really does not have capacity now,” he said.
“And we’re not exactly sure how that’s all going to work through.”
But apart from supply pressures on the sector, Bollard said the whole infrastructure and construction sector was having problems with planning consents.
“We have a very complex, consenting process, a very time consuming, very legalistic, very costly and sometimes quite unclear process that is leading to a bunch of problems,” he said.
“And in quite a number of large contracts, we think consenting probably costs 20 per cent of the total and in some cases a lot more.
“And the really interesting thing is the things that we don’t do because they’re too hard to consent, and sometimes those simply don’t appear to make a lot of sense.”
He said one consequence was that almost none of the “shovel ready” projects have started because they had not yet been consented.
“Even though they were awarded conditional on being design ready and ready to start within either six months or 12 months,” he said.
Bollard wasn’t critical only of the existing Resource Management Act but also the changes proposed by Environment Minister David Parker, which are expected to be legislated by the end of next year.
Bollard argued that everything involved a trade-off; doing something here could negatively impact something over there.
“But we don’t like actually facing up to that,” he said.
He was worried about the reforms proposed in Judge Tony Randerson’s report on the RMA.
“They’re saying do no damage to the environment, and then you can look at other possibilities,” he said.
“That isn’t a trade-off, that’s a red line, and we’re giving advice to government about that,” he said.
When an issue is potentially as politically corrosive as housing, politicians are likely to hope that conferences like the Waikato one will come up with a one page set of “magic bullet” recommendations which will solve everything.
The conference will have disappointed them.
But Robertson possibly foresaw that when he spoke on Wednesday in the opening session.
“It’s quite clear that the housing challenge remains massive for us,” he said.
“It is a supply and demand challenge and one that will occupy the time of this government and governments to come for some time.”