Adrian Orr and Grant Robertson with quills.

Grant Robertson v Adrian Orr: those letters, decoded

The New Zealand housing crisis, and how to tackle it, took epistolary form yesterday in letters from the finance minister and the Reserve Bank governor. We read between the lines.

Yesterday the finance minister, Grant Robertson, penned a letter to the governor of the Reserve Bank, Adrian Orr, on the subject of the housing market, and what might be done about it. Here’s our translation of that exchange, with perhaps a lick of interpretation, of what they mean. Our annotations – between the lines – are in bold.

Hon Grant Robertson

Minister of Finance

November 24, 2020

Dear Adrian

I am writing to you to seek your views on ways the government and Reserve Bank can work together to address the issue of rising house prices, as part of a wider suite of work that the government is carrying out on housing market settings in the economy, both on the demand and supply sides of the housing market.

The housing market is spiralling out control and you’re fixing it.

In the February 2019 Monetary Policy Remit, the government states that its economic objective is: “…to improve the wellbeing and living standards of New Zealanders through a sustainable, productive and inclusive economy. Our priority is to move towards a low carbon economy, with a strong diversified export base, that delivers decent jobs with higher wages and reduces inequality and poverty”.

Our priority is not more of the same skyrocketing house prices that we promised to stop.

I am aware that the Monetary Policy Committee is facing increased challenges following the large and unusual shock to the domestic and global economies as a result of Covid-19. This is a phenomenon around the world, which governments and central banks are grappling with. For New Zealand, I am 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. 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.

Seriously, this is bad. French Revolution bad.

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.

Guillotines bad.

House prices are influenced by more than monetary policy. In addition to the changes suggested here, the government has a wide ranging work programme aiming to improve housing affordability.

We’ll try some stuff too.

I am aware that the MPC is making increasing use of Alternative Monetary Policy tools by making interventions into financial markets to support the economy as a consequence of the impact Covid-19 is having on the domestic and global economies. The Alternative Monetary Policy tools that are now being used by the MPC were not envisaged at the publication of the February 2019 Remit. I believe it is right that we consider how these tools might be impacting the housing market, with particular regard to housing price inflation.

It’s easier to print money than to print houses.

I want to make clear that I am not proposing any change to the overall price stability and employment objectives of the Monetary Policy Remit. I also remain committed to upholding the operational independence of the setting of monetary policy by the Monetary Policy Committee (MPC).

Don’t freak out, I’m not touching the law.

I am open to a discussion with you about what is the best approach that the Reserve Bank could take to support the government in meeting our goals.

But I could if I wanted to.

One option I would be interested in your views on is changing Section 2b of the February 2019 Remit to better highlight that the MPC takes house prices into consideration when formulating monetary policy to help achieve the government’s objectives. I have included a suggestion for how this might be done, and would be interested in your views on this:
b) In pursuing the operational objectives, the MPC shall:
i. Have regard to the efficiency and soundness of the financial system;
ii. Seek to avoid unnecessary instability in output, interest rates, the exchange rate, and house prices; and
iii. Discount events that have only transitory effects on inflation, setting policy with a medium-term orientation

Our discussion will conclude with us agreeing these things.

I would welcome your views on any alternative proposals with regard to the Reserve Bank’s monetary or financial policy that would help address our concerns. This includes your views on any other changes that the Bank could make to support the aim of achieving the sustained moderation in house prices that we have both sought. I look forward to your response to this. The government is planning to make any changes, if agreed, soon, and so I would request that you gave it your earliest possible consideration.

Our discussion will conclude quickly.

I want to finish by thanking you and the MPC for your role in providing stability and support through the difficult period of Covid-19. I have greatly appreciated the collaborative way that you have approached your task, and I look forward to continuing to work that way.

You saved the economy, now save housing / our political bacon.

Yours sincerely

Hon Grant Robertson

Minister of Finance


Adrian Orr

Governor, Reserve Bank

November 24, 2020

Dear Minister

Thank you for your letter received November 24, 2020, seeking our views on ways we can work together to address your concerns regarding rising house prices. We welcome the opportunity to contribute to your work programme aimed at improving housing affordability. As I’ve said publicly on many occasions, monetary and financial regulatory policy alone cannot address this challenge. There are many long-term, structural issues at play.

Lol, as if it’s our fault.

I acknowledge that you do not propose any change to the economic objectives set out in Section 8 of the Reserve Bank Act – to maintain overall price stability and employment objectives.

We’re going to keep doing what we’ve been doing.

I also acknowledge your ongoing commitment to the operational independence provided by the Act for specific monetary policy decisions.

Back off.

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.

And then back off some more.

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. 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.

Thanks so much for alerting us to house prices we had never ever noticed them before. FFS.

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 can 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.

We’ve been warning you about this for years, dude.

As you note in your letter, the Reserve Bank has faced challenges in response to the economic shocks and uncertainty that has resulted from the Covid-19 pandemic. We are committed to continuing to provide stability and support.

But recently we’ve a little bit busy saving the economy.

Like other central banks globally, our key response to the Covid-19 economic shock has been to lower interest rates using a variety of tools. Lower interest rates promote spending and investment, thereby enabling us to meet our inflation and employment mandate over the medium-term.

Economic nosedive and bread lines around the country would’ve kept house prices down, if that’s what you were after?

Our monetary policy actions have been, and will continue to be, effective in supporting the economy through the Covid-19 economic shock. Effective monetary policy is incredibly important for our shared objective of promoting the prosperity and wellbeing of all New Zealanders.

You’re welcome.

Yours sincerely

Adrian Orr

Governor




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