The government has conceded that soaring house prices are increasing inequality and poverty, and the finance minister wants the Reserve Bank to do something about it. Justin Giovannetti writes from parliament.
There’s been an invisible wall down the centre of Bowen Street in Wellington for a generation. On one side is parliament and elected officials, on the other are the guardians of the country’s economy, the independent Reserve Bank of New Zealand.
Today, the first signs of a fresh crack in that wall appeared. Over the past few months the two sides of Bowen Street have been increasingly at odds over house prices. The finance minister, Grant Robertson, is now looking to bring the central bank into line by changing the way it sets monetary policy.
At the heart of this are two institutions doing what they’re supposed to be doing. The Reserve Bank has been doing its job since Covid-19 hit. Its mandate is to keep the economy growing and curb unemployment. Independence is supposed to insulate it from some of the repercussions of that mandate. Social issues, like increasing inequality, are a problem for parliament across the street.
New Zealand’s economy has been doing better than expected, despite a global pandemic. A lot of that can be attributed to a Reserve Bank that jumped on the problem immediately. It slashed the cash rate to 0.25% from 1% in March. That makes it much cheaper to borrow money. But that wasn’t enough as Covid brought the global economy to a shuddering halt.
The Reserve Bank then announced its intention to flood the country with up to $128 billion in new money over the next term of government. That torrent of money, which has already started, has driven down borrowing costs to near zero. That means commercial banks, as well as a lot of businesses, are now flush with cash. Where’s that money going? It’s been pouring into the housing market.
Anyone who has been at an open house in recent months, or has been hit with a hefty rent increase, knows what’s happened. The Real Estate Institute of New Zealand says the median price of a home has shot up by 16.4% over the past year.
To the Reserve Bank, that’s not a problem for it to worry about. “Complaining” about house prices is a “first-class problem”, bank governor Adrian Orr said last week.
Increasing home prices are generally speaking a good thing for the Reserve Bank. It means people with investments and homes are richer on paper, so they’re more likely to spend freely and with confidence. More spending is good for the economy. As home prices climb, they can borrow more and spend more.
While the complaints might not have moved Orr, they’ve moved Robertson and the government. With its legislative agenda at risk of being swamped by a growing housing crisis, Robertson announced today that the government is resetting its housing agenda. The first move: moving towards telling the Reserve Bank to stop pouring money into the economy and making the situation worse. House prices are now Orr’s problem as well.
“What we’re concerned about is rapidly increasing house prices, we’ve already seen banks projecting 15 to 20% increases in prices next year,” said Robertson. “Today is the day we’re saying we want to reset the clock.”
The problem, according to Robertson, is that house prices now threaten the country’s long-term financial health by creating more inequality and poverty. People without homes or investments will grow poorer, facing higher barriers to buy a home, and higher rents as landlords look to recoup their investments.
In practical terms, the government is asking the Reserve Bank to start a conversation about changing a few words in its remit. The existing Reserve Bank mandate, to boost the economy and lower unemployment, would remain.
There are already a few secondary issues that the bank’s Monetary Policy Committee needs to consider when making decisions. Along with ensuring that the financial system remains sound, the bank needs to try to keep prices, interest rates and the value of the New Zealand dollar stable. Housing prices would now be added to that list.
The Reserve Bank can, technically speaking, say no to the change. In a letter this afternoon, Reserve Bank governor Adrian Orr responded without a hint of submission to the minister’s request. He said the Reserve Bank would “consider” Robertson’s letter and “respond with considered feedback in due course.” Orr then added that the bank already does consider house prices when it makes decisions, so the change wouldn’t amount to much anyway.
As recently as last week, Jacinda Ardern said she didn’t want to interfere with the Reserve Bank, warning that past governments had learned “hard lessons” from messing with the central bank. She was referring to Robert Muldoon’s time at the helm.
However, the bipartisan consensus that the Reserve Bank’s independence is sacrosanct has been fraying in recent weeks. National had been calling for the government to rein it in. The apprehension about issuing instructions to the bank has disappeared as the scale of the housing crisis has become clearer. Every month brings ever higher prices, defying economists who’d expected a crash.
One of Ardern’s “concerns” stated in recent days, is for first-time buyers. New Zealand, she’s said, shouldn’t be a country where buying a home is limited to young people with parents who have deep enough pockets to cover their deposit. It might already be too late. Any first-time buyer who has applied for a mortgage recently would know this as the gentle question from a bank of whether or not a “donation” is expected from family.
The government’s plan is not to lower home prices, but simply to limit the increases to something more manageable. “A period of sustained moderation,” Robertson said.
Existing programmes to support first-time buyers have been inadequate, Robertson said today. In most cities, the government’s programmes don’t come close to providing the help someone would need to buy a home.
Ardern, and Robertson again today, have repeatedly ruled out a capital gains tax, in any form. Greens co-leader Marama Davidson had suggested a tax on capital gains by stealth, through existing taxes, but that was crushed by the prime minister.
As part of the housing reset, the government will look at what it can do to increase supply. By some estimates the country needs 100,000 more homes, but scaling up of construction is constrained by a shortages of builders. Some councils have also been reluctant to consent large-scale projects because of the costs of building associated roads, pipes, emergency services and other costs.
The government will also look to reduce demand. Robertson said that could include increasing the length of time someone needs to hold onto a house before it can sell, or face the so-called bright line tax.
One thing that’s unlikely to come out of today’s reset is a move by the Beehive to massively increase spending. Robertson shied away from any suggestion that he’s prepared to spend more. Most problems can’t be punted across Bowen Street. The Reserve Bank can’t do much for people on the cusp of poverty. It deals with the economy in abstractions, tinkering with interest rates and other accounting moves.
Where increasing housing prices worsen poverty, parliament can help. However, the Ardern government has ruled out a benefit increase for the poorest in society, because it says we can’t afford it. That happened as the Reserve Bank handed home and business owners billions of dollars, because it said it couldn’t afford not to do it. That’s the gap that Robertson is now looking to bridge.
Parliament’s reluctance to spend is near the centre of the housing crisis. Robertson began his presentation today talking about how the government has beat its projections according to the final economic accounts for the last fiscal year. Revenues are up, expenses are down and the deficit is lower than expected. That relatively rosy situation however hasn’t translated into spending to help those who haven’t benefited from the Reserve Bank’s money tsunami. It’s still unclear what the government intends to do for them.