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Author: Ryan Greenaway-McGrevy, University of Auckland
An accommodating monetary policy, less restrictive macroprudential rules and an economy resilient to the COVID-19 pandemic have precipitated significant increases in house prices in New Zealand over the past year.
In response, New Zealand Finance Minister Grant Robertson expanded the Reserve Bank of New Zealand (RBNZ) mandate to take into account the impact of monetary policy on house prices, and issued a directive that will shape the bank’s macroprudential policy. These movements could have a substantial impact on the future growth of house prices.
House prices in New Zealand have increased by around 82% in the decade following the global financial crisis. In February 2020, the median house price was NZ $ 640,000 (US $ 459,000). Ten years earlier it was NZ $ 350,000 (US $ 251,000). Over the past year, house price appreciation has accelerated, with the median price reaching NZ $ 826,000 (US $ 593,000) in March 2021.
Steps taken by the RBNZ to minimize an incipient COVID-19 recession have undoubtedly fueled the market uptick. The RBNZ cut its official cash rate to an all-time low of 0.25% and suspended restrictions on loan-to-value ratios, which impose minimum deposits on residential mortgages. Unemployment peaked at just 5.3% in the fourth quarter of 2020, helped by a wage subsidy program and the effective elimination of COVID-19 from the community.
These large and rapid increases in house prices are putting the New Zealand government under increasing political pressure to take action. In November, Robertson proposed change one of the roles of the RBNZ’s monetary policy committee is to prevent real estate price instability. He proposed that the RBNZ “seek to avoid unnecessary instability in production, interest rates, the exchange rate and house pricesâ€.
This proposal added house prices to the handful of economic indicators the bank must take into account when setting monetary policy. But that would not change the bank’s monetary policy goals, which are to keep inflation between 1 and 3 percent while supporting maximum levels of sustainable employment, despite some contrary perceptions. Robertson also gave the bank the opportunity to suggest alternative changes to its monetary or financial policy functions to address the government’s housing concerns.
Yet after receiving the letter, RBNZ Governor Adrian Orr said that “fiscal policy is much more efficient‘to ease the demand side pressure on house prices. That sentiment was later formalized in Orr’s detailed response to Robertson’s proposal in December. The RBNZ pointed out that the determinants of house prices are beyond its control and expressed his preference for changes to his financial policy duties over Robertson’s proposed changes to his monetary policy mandate.
Yet in February, Robertson pursued his proposals for mandate changes. However, he also echoed the RBNZ’s suggestion to focus on financial policy, issuing a “direction‘which affects the way the RBNZ operates in its role of promoting financial stability. Like other central banks, the RBNZ also acts as a regulator of the banking system and is responsible for maintaining a healthy and efficient financial system. The directive obliges the bank to pay attention to government housing policy in relation to its financial policy functions. Explaining the movement, Robertson declared that “the bank will need to consider the government’s goal of supporting more sustainable house prices, including curbing investor demand for existing housing stock to help improve affordability for home buyers. first house “.
This statement relates directly to loan-to-value ratios, which provide the framework for isolated investors in the granting of credit. Before the pandemic, investors faced more restrictive loan-to-value ratios than homeowners due to the RBNZ’s long-held view that investing in housing poses a risk to financial stability. Homeowners demanded a minimum deposit of 20 percent, while investors demanded 30 percent for existing homes. Even before the instruction was issued, the RBNZ had brought forward the consultation period for restoring loan-to-value ratios and, in February, announced that the restrictions would be reinstated from March.
The RBNZ also announced that the restriction on the loan-to-value ratio imposed on investors will be further tightened from May to a minimum deposit of 40%. These measures are expected to help mitigate further increases in house prices and improve housing affordability for first-time home buyers. Research has shown this loan to value ratios and related credit restrictions are effective in containing price appreciation.
Yet the direction of the government further obscures the purpose, implementation and evaluation of macroprudential policy. Prior to the direction of Robertson, eminent experts have supported that New Zealand’s macroprudential rules needed to be clarified and developed. The new direction increases the risk of future conflict between the government’s housing goals and the RBNZ’s duty to promote financial stability. the planned introduction of a financial policy mission later this year will be an opportunity to address these issues.
At this time, it is clear that the government’s current wording of the target does not require a direct promotion of affordability for first-time homebuyers. Rather, government policy is to curb investor demand in order to promote affordability. This is an important distinction given that populist demand for easy credit threatens financial stability. The current loan-to-value ratio settings, which require a 20% deposit for homeowners but a larger deposit for investors, appear conservative while giving homeowners – including first-time buyers – an advantage. when they bid on a house.
Ryan Greenaway-McGrevy is Associate Professor in the Department of Economics and Director of the Center for Applied Research in Economics at the University of Auckland.
