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Summary
- House prices in NZ surged to record levels with median prices rising by 11.1% in the year to September.
- Robertson has suggested including stabilising house prices as a factor for consideration in the remit when devising monetary policy.
- Governor Adrian Orr responded to letter stating that he will consider the feedback but noted that a lot of long term and structural issues are at play.
- Housing will take some time to be changed, and any real check on rising house prices is not expected any time soon, as per some economists.
NZ’s housing market is booming when the economy has suffered the biggest recession since the Great Depression (1929-1933), coronavirus causing border closure and rising unemployment. House prices have risen to record highs which were expected to fall during the pandemic.
Data from REINZ and Trade me showed that nationwide median prices are now above $700,000 while the median price of home in Auckland is now more than $1 million in September.
NZ witnessed an 11.1% rise in median prices in the year to September while prices have risen 2.5% across the country in September as compared to August.
Loose lending policies and cheap loans to get the economy back on track amid COVID-19 have got investors back in the market.
Hence, the increase in house prices led the NZ government to review policies related to the housing market and get advice from the central bank on the same.
Image Source: ©Kalkine Group 2020
NZ government asks RBNZ to consider house prices
Grant Robertson Finance Minister had written to RBNZ Governor Adrian Orr suggesting a reform to the laws under which it works, to consider the effect of any monetary policy on house prices. He stated that the government was reviewing housing policies and had written to RBNZ as policymakers struggled with rising house prices and the risk of a property bubble.
ALSO READ: Has NZ housing market reached new heights?
However, he stated that he had no intention to instruct or direct RBNZ or bring out any alteration in the central bank’s mandates of managing inflation and boosting employment.
He also added that alternative monetary strategies implemented by RBNZ to offset the economic effect of coronavirus such as the bond-buying scheme, low-interest rates and backing bank loans affected the housing market.
RBNZ Governor’s response to the government letter
Adrian Orr RBNZ Governor replied to the letter stating that he would consider house prices as suggested by the government when preparing monetary policy. He stated that there were many long-term, structural issues at play that affect housing affordability.
He asserted that lowering interest rates to increase house prices was the key method for MPC to meet its inflation and employment targets.
DO READ: Reserve Bank tools to impact the NZ housing market
Mr Orr also added that MPC considers the possible effect of monetary policy on asset prices, including house prices, as these are major communication networks that influence inflation and employment, the two main economic variables.
He also said that housing market-related prices are also included in CPI, for example, construction costs, rents, rates, and housing transaction costs.
Orr highlighted the RBNZ was consulting on reintroducing LVR restrictions to limit bank lending against property 2 months prior to than it had previously said it would look at the problem.
Mr Orr stated that higher-risk lending for housing purposes is also a significant factor for financial stability. For several years, the danger to the financial sector has been observed by the central bank that highly indebted households and corporations can pose.
He ended the letter saying that the monetary policy actions will persist in supporting the economy through the coronavirus blow. For the common aim of fostering the welfare and well-being of all Kiwis, successful monetary policy is highly necessary.
Economists take on rising house prices
Record low-interest rates and massive stimulus packages by the government to lift the economy affected by coronavirus, pumped up NZ’s housing market even more. This proved many analysts wrong who had predicted a downturn.
Westpac chief economist Dominick Stephens stated that RBNZ had estimated a negative 7% house price inflation for the year ended December 2020 in its August monetary policy statement. However, they were surprised by the soaring housing prices.
Mr Stephens state that RBNZ had lowered interest rates to stop inflation from falling, but that has triggered a house price boom. Subsequently, prices have risen, which are a threat to financial stability.
Infometrics Senior Economist Brad Olsen stated that the government had taken the right step to foresee if RBNZ is considering house prices. However, RBNZ will not fundamentally shift the way it sets monetary policy, and there will not be any strict vigilance on surging house prices anytime soon, he added.
He noted that the reality remains that housing will take some time to adjust and will need considerable government support rather than the government transferring the blame.
(NOTE: Currency is reported in NZ Dollar unless stated otherwise)
