By Bernard Hickey
Finance Minister Bill English has downplayed the potential impact of the Reserve Bank's proposal for banks to hold more capital against mortgages to landlords and has said the central bank will have to take into account any impact on new house building.
ANZ economists said yesterday the new capital moves could have a bigger impact than limits on high LVR lending imposed in October 2013 and the Property Institute has warned any increase in interest costs for landlords would increase rents and restrict attempts to build new supply.
English told reporters before the ruling National Government's Parliamentary Caucus meeting that the Reserve Bank was concerned about double digit house price inflation and was taking "small and sensible" steps to ensure financial stability.
"I wouldn’t imagine it would have a huge impact. In the long run the main issue is the (housing) supply, which we have been focusing on for some time," English said.
Asked if the moves could restrict supply, he said: "That’s one of the things that the Reserve Bank has to balance up. Having a set of rules that reduce the possibility of excessive borrowing which later on causes significant problems on the one hand, but on the other hand enabling financing of the developments we need."
He would not comment on whether new builds should be exempt from the Reserve Bank's new Macro-Prudential tool for capital on landlord mortgages, as was the case (eventually) with its high LVR speed limit.
RBNZ target undershoot?
English was then asked about whether the Reserve Bank was undershooting its 1-3% target for CPI inflation, given Prime Minister John Key pointed out on Monday the Reserve Bank would have to be mindful of a possible under-shoot as inflation headed towards 0%.
"It’s been undershooting its target for quite a while now. Again, they have got this dilemma they are trying to deal with of -- where inflation’s heading towards zero, but house prices in Auckland are still going up at over 10% a year and that’s a very unusual set of circumstances," English said.
English said it was up to the Reserve Bank to decide whether to cut its Official Cash Rate, "but the policy targets agreement has a zone of one to three per cent and it looks like inflation’s going to be outside that zone this year, probably. But they’ve got to be careful. If they cut interest rates then it may put more petrol on the housing market."
Labour Leader Andrew Little criticised the comments from Key and English and said he would not comment on the bank's moves on monetary policy, given it was independent.
"I think it’s wrong for senior politicians to be trying to use megaphone diplomacy to advise the Reserve Bank Governor what to do. It’s not the way the system works at the moment," Little told reporters.
New regulatory interventions in Auckland?
English was then asked about possible further regulatory interventions in the Auckland housing market, as foreshadowed by Housing and Construction Minister Nick Smith in Auckland last week. Smith declined to detail the interventions.
English said there may be opportunities for the Councils to work with the government "to assist some larger, one-off type developments. That’s yet to be worked through."
English, who is also Housing New Zealand Minister, said Housing New Zealand had a strong interest in having heritage overlays in Auckland diluted "because it declared, potentially, a big chunk of their stock as heritage, which would make it a lot harder to redevelop it."
Key on Auckland Housing
Meanwhile, Prime Minister John Key said it was inevitable that Auckland would have more dense housing around the central business district.
"Auckland needs to spread out and ultimately will go up as well, and that’s just a fact that you will see a lot more property developed in the form of apartments, and a lot of those are likely to be downtown," Key told reporters in Wellington..
"You have to allow the city to move out, but you also have to accept it will move up," he said.
English on a Budget Surplus
English said it remained a challenge for the Government to reach a surplus in the current 2014/15 year, given inflation was headed towards zero, which was dampening growth in the tax base.
"But we are headed in the right direction. Whether it’s plus or minus a few hundred million isn’t going to matter that much in the broader economic sense," he said.
'Right type of deflation'
English said low inflation was good for households and businesses.
"It happens to make it a bit difficult for the government to get the tax revenue in, but our type of low inflation seems to be helping confidence that we can have a sustained period of growth," he said.
"We don’t have the sort of deflation they’ve got in Japan or increasingly in Europe which was much more about consumers losing confidence and putting off their decisions to spend."
7 Comments
Hmm I guess shrinking the money supply won't affect the Auckland market if it's driven by overseas purchasers? I was just thinking tonight about the wealth effect as I lost an auction to a phone bidder.
I wonder, what is the opposite of the wealth effect? I came up with this.
The poverty effect. The premise that when currency is debased then "wealth assets" denominated in that currency naturally rise in price. The non-asset owning portion of the population who do not participate in this wealth creation feel deeply uncomfortable about their diminished purchasing power, and diminished prospects for future wealth acquisition. This causes them to spend less!
For example, when houses are priced at >10x average income and buying is dominated by foreigners with access to funds at 2% interest! Even people who earn in the top 10% of well paid jobs end up living in shared flats well into their late thirties and beyond. They do not purchase new white wear, furniture, gardening implements etc, and if they do they buy second hand. They don't spend money on renovation. Without a house, they also delay having children for as long as biologically possible, and in some cases they won't even be able to have children because they left it too late. They practice extreme austerity scrutinizing every retail purchase against the online price. It's all to no avail though, cause like Piketty says, capital is appreciating faster than earnings.
Related to this article - It's interesting that the RBNZ is adopting a position advocated by Steve Keen some time ago. It's hard to imagine a deceleration in the level of private debt without a recession, unless of course the RBNZ anticipates a simultaneous and significant lowering of interest rates. In that case restricting borrowing now would be a pre-emptive countermeasure.
The BoE seems to have a more intelligent stance than the National party.
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