Reserve Bank (RBNZ) Governor Adrian Orr is refusing to be Finance Minister Grant Robertson’s whipping boy as the government comes under increasing pressure over soaring house prices.
Speaking to media on Wednesday, Orr said he was “really pleased” the RBNZ was “being invited into the discussion” over how to address rampant house price inflation.
Robertson on Tuesday wrote to Orr over concerns around the impacts its loose monetary policy (IE low interest rates) was having on house prices.
Robertson proposed the Monetary Policy Committee’s (MPC) remit be tweaked to require it to “avoid unnecessary instability” in house prices.
He said he welcomed the RBNZ’s views on “any alternative proposals with regard to the Reserve Bank’s monetary or financial policy”.
But Orr said in an interview with Stuff that the government, or fiscal policy, was best-placed to curb housing demand. He said the government could be more targeted than the RBNZ could with the "blunt" tools at its disposal.
Asked in a press conference whether the RBNZ would give the government advice on how it could change the tax system to address issues around housing and inequality, Orr said: “At the moment I don’t know the broader work agenda. One would assume issues of taxation would be in the broader work agenda…
“There has been so much work over decades on this issue that I don’t think problem identification is too difficult… It’s really around appetites for accepting policy recommendations.”
Robertson on Tuesday said he directed Treasury to look at what the government could do on housing affordability. He said extending the bright-line test beyond five years was on the cards, but a formal capital gains or wealth tax wasn't an option.
In an interview with interest.co.nz, RBNZ General Manager of Financial Stability Geoff Bascand said the RBNZ would look at how it could use macro-prudential tools that restrict bank lending to allay Robertson’s concerns.
But like Orr, he noted the likes of loan-to-value ratio (LVR) or debt-to-income ratio (DTI) restrictions could make things harder for some home buyers. He said using these required making trade-offs.
Orr tempers expectations around what the RBNZ can do to moderate house price growth
Orr stuck to the defensive position he took in the letter he wrote in response to Robertson on Tuesday, stressing the RBNZ already considered house prices in its policy-making.
Asked whether adding a house price clause to the MPC’s remit would therefore be a redundant move, Orr said: “I just wanted to make sure that people understand where we’re starting from and have clear expectations about what can and can’t be done.
“Because setting up false expectation for broad stakeholders - public alike - is not good policy setting.”
Orr clarified Robertson gave him a heads up on Monday that a letter was coming his way. He said he received the letter at around midday Tuesday - two hours before it was made publicly available, and a day before the scheduled release of the RBNZ’s Financial Stability Report.
Orr said the RBNZ’s would have had to have been “absolutely remiss” to have been surprised by the letter.
“The housing market, house prices, the haves, the have nots - all of these issues have been very high profile for decades in New Zealand,” he said.
Sean Keane of Triple T Consulting, in a note for Credit Suisse, said the public exchange of letters indicated there was “friction” between the RBNZ and Robertson, which was “unusual” given they had worked well together to date.
“The housing issue is clearly a break in that relationship, and at its core housing is always more of a political than an economic issue,” Keane said.
He believed the trigger for Robertson’s letter was Orr’s comments at the Monetary Policy Statement press conference on November 11. Orr and his colleagues repeatedly said they were not in the business of targeting house prices and were more concerned about the financial stability risk to banks that come from poor lending decisions.
Given Robertson made a point that week of telling media (during discussions about house prices) he’d brought forward a meeting with Orr, Keane said Orr's comments may not have been to Robertson’s "liking”.
Keane maintained it was reasonable to assume Robertson raised concerns over house prices with Orr and asked him if the RBNZ could pay more attention to the matter through its financial stability remit.
“The Governor’s comments at the [November 11] press conference didn’t hint in any way at the level of additional concern that Robertson perhaps wanted to see, and hence the need that he felt to issue such an unusual public letter,” Keane said.
Asked on Wednesday whether he was annoyed about the way the RBNZ was being drawn into politics, Orr stood by the response of the RBNZ and government to Covid-19 and said the New Zealand economy was “one of the most resilient on Planet Earth to date”.
He then acknowledged it had been flippant for him to call house price inflation a “first class problem” in a media interview after the release of the November 11 Monetary Policy Statement.
“What I meant was it was the worst problem except for the alternatives,” Orr said.
Will the RBNZ ultimately have to give way?
Keane said if Orr chose to contest Robertson’s request on taking account of house prices he'd be "misreading both the mainstream and the political mood of the moment".
“Governor Orr generally finds himself on the more populist side of most public debates so his positioning on this one will be interesting to watch,” Keane said.
“Whilst Minister Robertson’s letter was worded as being one of seeking input and ideas from the RBNZ and of consulting with the Bank, it is ultimately the case that if Governor Orr does not agree, then the Minister has the tools at his disposal to force this change through."
As per the video montage below, Robertson acknowledged as early as June that he was not designing his Covid-19 response with regard to the RBNZ’s monetary policy, nor considering the side effects of printing billions of dollars.
*This article was first published in our email for paying subscribers. See here for more details and how to subscribe.