Much of the huge financial stimulus being pumped into the economy seems as though it is being pumped into the housing market. David Hargreaves says the Reserve Bank has some serious thinking to do ahead of its last two major set piece events of the year

No way, who would have thought. Thinking doesn't seem to be on the RBNZ agenda right now.

Clearly prices will continue to rise at 10-15% pa for at least 6m now that RBNZ has fuelled them.
LVR removal huge error, needs reversing
Plus RBNZ seems to make no reference to all the billions that NZ is spending at home rather than abroad, which pre summer, FAR outweighs what tourists are normally spending here. This is giving Kiwis businesses etc, a boost unanticipated by models of RBNZ. people are bidding $200k over CV, and CV is itself 3.5 years out of date.
Also, prices barely rose from March 17 to October 2019, meaning pent up demand from folk wanting to sell but unwilling to put house OTM. Now those potential vendors are really sellers and are OTM ATST as buyers been rocket fuelled by int rates and LVR. Combination is most unfortunate except for those able to leverage (investors) and those sitting pretty and those wanting to leave Auckland with a shed load of equity and to area of less pop density (see NSC sales). The thinkers at RBNZ do not seem to include much critical input from REAs. And RBNZ doing what it is doing whilst gov spending is rocketing, also never gets a mention re money supply growth. Which is huge. Clearly RBNZ thinks that a huge drop in spending to come due to rise in unemployment, needs a huge counter effect from them. But both sides of this equation seem to have been miscalculated. Inflation in asset prices will (finally) feed through next year to CPI and RBNZ will not be able to raise rates to choke it off. So, real wages will fall as a result and that will not be what RBNZ and gov want. Both parties have over-reacted.

Property is going a bit crazy in a few parts of the world right now.
In touch with my brother in Sweden this morning, outer suburbs and rural lifestyle areas within 1.5 hours drive of Stockholm are going mental- about 20% higher in the last 6 months. Stockholm itself, much less.

I agree with the writers sentiments. Six months ago our economy could have easily tanked, sentiment alone could have driven us into a depression. The RBNZ was right to throw everything including the kitchen sink at it. Now we can see the world is not ending - at least not due to Covid. The RBNZ should now tweak upwards - very gently. The game they have been playing has been very lopsided to the advantage of those that already owned assets such as housing and shares and against those starting out. The rich have gotten richer and the trickle down effect only exists in the fantasy of National Party philosophy.

A central bank (and government) housing ponzi. What a bizarre world we live in these days.

Try explaining this to the children of 2050 - yes the central bank and government purposefully introduced policy to make it more difficult to buy a home (FHB) but made it easier for people gambling with leverage (investors) to buy more houses and make the situation worse. It really is daft.

Is it risky? At a time when we need a small amount of targeted stimulus, it should have been obvious what to do - ensure businesses can access funding to maintain unemployment. This would have meant restricting any funding to business loans at very low interest rates via the banks. Did they do this? Hell no, they threw the rule book out and allowed the banks to lend as much as they wanted to anyone. They did this knowing that the banks have most of their lending in residential mortgages. They could have restricted lending to housing by say increasing LVR's, to ensure it was targeted. Instead, they threw out LVRs, claiming the elusive "wealth effect" will get us through (hilarious), while greatly increasing systemic financial system risk.

I would suggest that they know exactly what they are doing. They see an economy designed to flow money to asset holders, particularly property holders. It is obvious to everyone, that when you have such an economy, lowering interest rates and borrowing costs while the gubmint prints money is going to cause those assets to increase in value. It's blindingly obvious to anyone that looks. So they knew. They did it anyway. And they aren't turning around anytime soon, with more housing market fuel coming in the next round of stupidity.

Since they know, I would suggest it's deliberate. I really hope a good investigative journalist is finding out why, but I doubt it. I would find it entirely unsurprising if Orr & Co are sitting around with the heads of certain large private financial institutions discussing future options and how they can all be better off.

You can understand how things like 1929 and the holocaust happen now - people collectively become stupid (and fail to think).

The income / house price mismatch is about the worst thing we can do to young people and all citizens.
Pretty much up there with cancer.
All this reserve bank talk and GDP, stimulus, balancing chatter is twaddle talk.
It enables us to forget low income New Zealanders could own houses in their twenties, have families and even a bach just meters from the sand.
The big talk makes us forget what it's really about.

We can only collectively hope RBNZ operate on the basis of evidence, not the "refuse to turn" that has been bred into politicians by media squawking about every u-turn as if it's a bad thing. Evidence changes, mistakes are better fixed, and when a hole's too deep there's value at least stopping digging.

"Rising house prices, at least for the moment, are likely to provide a boost to consumer sentiment and to spending"
So those who aren't 'in' the home-owning market - you know, them there citizens who want to step onto the First Rung of the Property Ladder; the very Rung that supports all of the rungs above it - are going to have their sentiment boosted by the need to tie up even more than every cent they earn accumulating a deposit? I'd find that anti-boosting; depressing, personally! And I'd stop going to the cafe to buy a coffee, so as to save what extra cents I still hadn't applied to the cost of my current shelter.
But I could always cheer myself up by raiding my future; stored away in my Kiwisaver Account, I guess.

If only some of the DGM commenters had spent less time theorising about ‘the great reset’, and more time predicting the great price growth. We could all be celebrating great gains rather we have to listen to their continual complaints!

This makes me think that the black swan event caused by Covid might not be economy downturn or unemployment or falling housing price. But the real black swan could be RBNZ's overreaction causing huge amount risky debt overstimulated assets bubble. We might've been wrong from the start.

The Reserve Bank have sort of backed themselves into a corner now because the repeated narrative among property investors Ive talked to is 'no matter what now, you can't lose'. 'Interest rates can't rise and if prices start falling the central bank will just throw more money at it!'. So now we have an asset class, of which the buyers think they're indestructible because of the interventions of an outside player, who people think have absolute control of the market. It might be a bit of a surprise if/when they realise that they don't.

I expected house prices to pull back 10-20%, so missed out and am still waiting. I can't believe that there isn't some degree of pushback from the media or general population, only occasional mention of 'central bank independence' from political influence, but what the hell, if their mandate is price stability, then why aren't they being challenged or held accountable? Is it general ignorance on the part of the media or population at large? On the bright side (to my thinking), you couldn't devise a better way to stimie excessive growth in NZ, as everyone's capital will be going towards paying their mortgage, young people will be likely leaving in large numbers, and those that remain will be delaying and having fewer children. Maybe they have a plan afterall!

It is disingenuous to say this is an unintended consequence. I suspect the RB and our govt know that rising house prices are the lesser of two evils.

It is an engrossing situation. Behavioural economists should be mining this for years to come.
RB has underestimated the power of psychology. -- the sheer power of FOMO applied to an asset class as emotionally charged as NZ property.
I can't wait to see the next twist in the story.
It's also revealing seeing how bank economists are rapidly reversing their forecasts. It shows how inaccurate their predictions are, too -- probably because they expect rational behaviour.

Indeed, Preferences trump Plans. GingerNinja (ears on?), with a behavioural economics perspective, will perhaps chime in here.

Population growth in NZ overall is negative right now. By thousands per month. Nobody knows the granular data of who is coming in and who is going out. If they do know they are not telling. There are hundreds of dwellings under construction right now in Auckland alone. This is musical chairs. People going round and round swapping chairs with each other. Leaving rented chairs and buying their own chair. Upgrading their chairs. Buying chairs in the hope that others will pay rent to sit on them. But the game is flawed because we are adding more chairs instead of taking them away. Eventually, there will be some empty chairs that no one wants to sit in. Either nice new shiny ones or old and grotty ones. Their owners may not be able to afford the holding costs. 2% interest is still a lot when you have NO income.

The RBNZ needs to address two unfortunate aspects of monetary and regulatory policy action.

Cutting official interest rates in half so frequently (five times since 2008) without investigating why term government bond yields are persistently forecasting virtually nil economic growth despite central banks' best attempts to kid us otherwise.

Banks extending 60 % of their lending to one third of already wealthy households to speculate in the residential property market because the RBNZ offers them an RWA capital reduction incentive to do so.

Who is pulling the RBNZs strings, monetary policy is destroying the social fabric of NZ. Idle debt speculation at the behest of protecting bank profit is out of control. The even stupider house prices is one of the single greatest pressure points for all Kiwis trying to live in NZ.

Only TOP has a tax policy to directly target this stupidity. Punish speculation (land tax) and promote productive activity (lower paye).

This issue was well articulated by Mervyn King 4 years ago in his book The End of Alchemy. I quote; "The most obvious symptom of the current disequilibrium is the extraordinary low level of interest rates which, since the crisis, have fallen further. The consequences have been further rises in asset prices and a desperate search for yield". Then; "Central banks are trapped into a policy of low interest rates because of the continuing belief that the solution to weak demand is further monetary stimulus". I wonder what he would say now as ever more fuel is thrown on the fire-raging conflagration?

As the RB is well aware, a negative cash rate and direct bank funding will do little to encourage additional borrowing by business, but will further underwrite property speculation. I am one of the 'winners' with both a long held share and property portfolio, but the ever increasing wealth gap worries me. This is not healthy for long-term social cohesion.

who is responsible/ top dog?
Mr Orr or
Mr Robertson for having no oversight of Mr Orr.

Will we see banks eventually offer 40 year home loans to pump more debt into this? In my opinion it is clear that Auckland is going to become totally unaffordable to anyone (or extended family) who is not already in the market, unless you want to buy 50km out of the city. Potentially we are just undergoing a significant change in our country, similar to say Switzerland where ~30% of the population own property and the remainder rent, goodbye to the kiwi dream.

Happy Realiazation That RBNZ by its policy is Stimultaing Housing Bubble but may be is to cover actual businesses defaulting and job loss but I guess everyone knows that only economy in NZ is Housing Economy as house is No More a Home but specualtive product.

The real problem is not the system but the false narrative that surrounds it. That narrative being money is sound and worth saving. Bob Jones wrote books about this - assets don't appreciate, money depreciates. If you print a mountain of money, then you can expect to see that inflation go somewhere. Many people now understand this and are happy to borrow that mountain, knowing an even bigger mountain is on the way. The cat is out of the bag. The mainstream media are still clueless along with people who think the Covid borrowing needs to be paid back. Inflate, inflate, inflate. We are experiencing house price hyperinflation!

All pretty predictable going forward from this point onwards. Interest rates need to RISE to curb the housing market or if they FALL or even stay the same, it will continue to go gangbusters throughout 2021.People are no longer wasting large sums of money on travel and with poor returns on your TD and low rates its all going into the housing market because the general consensus up until this point in history is that prices can only go up.

Businesses and housing both clearly point at taking a break from providing more stimulus and I think the right thing to do would be to delay both the FLP and negative OCR (not take them entirely off the table) until there are actually clear signs of many businesses failing, unemployment rising substantially and house prices cooling off. Sadly I think that Mr Orr will carry on with his plans despite data telling him to do otherwise.

Great article David, can you please email a copy to Adrian Orr, including the comments so that he understands both your points and the general sentiments of the populace?

Hi everyone,

I have just written to Adrian Orr and asked him to read David Hargreaves article as well as some of the comments. I invite you all to write a similar email, simply asking him to read David's article. Maybe, if he gets enough emails from us all, he will consider some of the points raised.
His email address is: adrian.orr@rbnz.co.nz.

You can flick a quick reply to my post when you've done it.

YT

I asked this in a different story last week. Where is the carnage to justify the RBNZ's super easy money policy? The government's wage subsidy has been expensive and enough.

Hello Adrian
Corruption is a form of dishonesty or criminal offense undertaken by a person or organization entrusted with a position of authority, to acquire illicit benefit or abuse power for one's private gain.

Your behaviour in recent times makes no sense . We have negative real interest rates and property investors pay the same interest as FHB. The government has raided the treasury for 64 billion of future taxpayers money so that you could keep interest rates low.

You have raided the government purse and given it to property investors.

Why? Are you perhaps a property investor?

Regards

Talked to a friend this afternoon, he's into property. He is looking at leaving the country, doesn't want his children saddled with huge debt, thinks all assets are grossly overpriced that there are little of no business opportunities.
He thinks his only option is to sell all his investment properties and go elsewhere. He has a few places in mind and actually some pretty interesting ideas

Very interested to see what RBNZ does to try climb out of this.. I think they really need to redirect their stimulus towards industries.. As a mortgage adviser I see banks pulling back on building and development which used to be encouraged by RBNZ and focusing lending to the plump low hanging fruit.. If they let banks keep the LVRs as they are they should have minium requirements of or 'subsidised' bank lending towards building (not just land), existing security developments (payable on invoice only to weed out the cashies) and business lending to encourage growth in the sector.. So many 'shovel ready' trades can flourish without needing employees to have tertiary qualifications if funded by motivated the banks

RBNZ is full of knowledgeable personnel with regard to what is 'all about in NZ economy', thus they knew what to do here. The meteoric housing price increase has been carefully thought for, pros & cons. Soon after the FLP, most of Kiwi dream of entering into intrinsic wealth creation with peace of mind will be in full gear realisation by 2021, more QE on cards, mortgage deferral, Lab will back in with more pronounced wage subsidies. RBNZ with govt. both are ensuring Kiwis about their employment stability assurances, with that in mind? only mad persons living here in NZ Not following the current advise, sorted your Finance quickly get on to that rescue ladder it's going to be pull up soon by Helicopter, so grab your chance to survive.. jump on to it, it's long term commitment, intrinsic blah value. Don't listen to those so called forecasters, never heard any sad story at all the past 30yrs of RE investment - you're on for another long run of 30 years upwards trajectory of wealth & financial freedom. Be kind help this country moving post Covid19, your long mortgage deal will help the future wealth productivity for this country.. you know that trickle down effect $ spending etc.