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Summary
- RBNZ Governor stated that he plans to discuss tax changes that can be used by the government to cool the housing affordability crisis, responding to the letter by Grant Robertson to consider house prices in devising monetary policy.
- RBNZ Governor stated that using tools such as tax would be a more effective way to promote housing affordability than the traditional interest rate-setting tools.
- The central bank confirmed to reintroduce LVRs next year to make sure that there is not excess leverage or excess debt borrowing in the housing market.
Adrian Orr Governor of RBNZ had welcomed the letter written by the Finance Minister Grant Robertson, which asked the central bank to consider house prices alongside inflation and employment while formulating the monetary policy.
Mr Orr has responded strongly to the Finance Minister's request stating that he plans to discuss tax changes that the government could use to cool off the housing affordability crisis.
The Reserve Bank is accountable for monetary policy, setting interest rates mainly through the OCR, and is structurally independent of the government that governs fiscal policy and taxes.
TO KNOW MORE, DO READ: NZ government approaches RBNZ to deal with skyrocketing housing prices
Taxes more effective than interest rate tools
Most market watchers suspected that the letter from Robertson would lead to Orr proposing some monetary policy alternatives to the crisis. These would be economic instruments regulated by Orr himself.
However, Orr has been keen to underline in his public reactions to Robertson that he sees his position as something more significant than just looking at what the Reserve Bank might do to draw some steam out of the housing market.
ALSO READ: Has NZ housing market reached new heights?
He wants to lend tremendous intellectual strength of the bank to provide policy recommendations to the government on what it should do.
As per Orr, the use of tax instruments would be a more reliable way to facilitate housing affordability than blunt instruments such as the interest rate-setting tools of RBNZ.
RBNZ to bring back LVRs
On 25 November, RBNZ confirmed to bring back the loan to value ratio restrictions next year where banks will need a deposit of 30% from investors to get a mortgage and 20% from home occupiers.
Few commercial banks like ASB and BNZ have already announced them ahead of the Reserve Bank's decision to strive and cool house prices by slackening the buying rush ignited by the present buying-friendly atmosphere.
ALSO READ: RBNZ confirms to reintroduce LVRs next year to keep a check on rising housing prices
LVRs are needed to ensure that there is not excess leverage or excess debt borrowing in the housing market as they are the risk places for households to be at.
Stricter LVRs would make people take a break, but it wasn't clear that they would affect the marginal price of homes, as per Orr.
