Oh, those houses...
That might be what the folk at the Reserve Bank are thinking at the moment as our runaway housing market continues to show every sign of just trucking on through winter.
And it just feels, anecdotally, as though the market has kept on bubbling pretty much through July as well. I'll be surprised if the housing sales and mortgage figures for this month show much cooling.
Which simply ain't what was supposed to be happening in the world of the RBNZ.
Having opened the floodgates for the 30% house price appreciation we've seen in the past 12 months, (okay, don't start me off on that again), the RBNZ attempted to pull things back by hitting investors with a reinstated 40% deposit rule as of May 1. The Government meanwhile took the nuclear route with its decision to can tax deductibility on interest payments for investors, as part of its March housing package.
Perhaps not unreasonably, the RBNZ expected this salvo would do the trick.
In its May Monetary Policy Statement (MPS) the RBNZ forecast that house price growth would plummet to just 0.2% for the September quarter, down from 5.5% in the June quarter. It was forecasting that in the December quarter house price growth would have further slowed to 0.1% and then down to 0.0% for both the March 2022 and June 2022 quarters - bringing annual house price inflation down to just 0.4% by June.
Housing is an issue that sits a bit strangely within the RBNZ's mandate. Our central bank has two 'hats' - one involving running monetary policy and the other safeguarding financial stability. There often seems to be a lot of public confusion, but the reality is that housing is a financial stability issue. Well, that's until it becomes a monetary policy issue. At which point it all becomes as clear as mud.
In a very broad sense, it actually doesn't matter to the RBNZ what house prices do. And this is where the public often get confused and think that our central bank should be the guardian of first home buyers and keeping prices affordable for them. No. It ain't like that. BUT the RBNZ does get bothered if house prices go up in thousands of dollars every week and this then forces people into very risky borrowing behaviour. Because if everybody gets geared to the gills, and house prices start to fall, and banks start to seriously rein in credit - well, there's your financial stability risk.
So, the next MPS announcement from the RBNZ on August 18 should theoretically not be about house prices. But it will.
As mentioned above, housing can actually start migrating from being a 'financial stability' issue to coming under the 'monetary policy' arm if the house price movements are extreme enough to start feeding into generalised inflation. And, well they are. Boy are they. Not least of course is the cost of building a new house (which is included in the Consumers Price Index). That's, er, going through the roof, with prices having risen 7.4% in the past year, according to the recent inflation figures.
But, even beyond that direct impact, you've got to believe that at least part of the buoyancy and spending in the overall economy - and willingness to accept higher prices - is stemming from the 'wealth effect' people are feeling from sitting on a home that rose in value 30% over the past year.
So, if inflation's getting out of hand, the RBNZ has its monetary policy tool, the Official Cash Rate to call on.
Plenty to ponder
Following those extremely strong inflation figures, most economists were prepared to say they thought the RBNZ would move on August 18 and raise the OCR from the emergency level of 0.25% it has been on since the Covid-crazy days of March 2020.
There's a heck of a lot to consider though for the RBNZ to do that. We would be very early to the party - at a time when our trans-Tasman cousins, for example, are a long way from even contemplating rate hikes. We could face being rather out on a limb, particularly if the United States doesn't look like starting a hiking cycle imminently.
But in many respects, because of the success of last year's Covid lockdown, our economic cycle is way ahead of where it is in other countries. And the RBNZ could do with a hand with those pesky house prices.
This text from the RBNZ's report of the last Monetary Policy Committee (MPC) meeting on July 14 was interesting.
The Committee agreed that the recent rate of growth in house prices remains unsustainable. Members noted that some of the factors supporting the ongoing house price increases have eased. These include a rise in housing supply as construction picks up pace, and more constrained investor demand due to increased loan-to-value restrictions and changes to housing tax policies. The Committee agreed that any future increases in mortgage rates will further dampen house price growth.
The last sentence is particularly notable: "The Committee agreed that any future increases in mortgage rates will further dampen house price growth."
As it happens on July 14, ahead of the MPC meeting, ASB announced a series of meaningful hikes in its mortgage rates. And these were swiftly matched by others in the market.
Get the cold water
We know from previous experience that mortgage rate rises DO pour a bucket of cold water on hot house prices. Whatever else might not work - mortgage rate rises as sure as hell will work.
If the RBNZ now decided to NOT increase the OCR next month, what would happen to the mortgage rate increases that the banks have so recently implemented? Well, they may be reversed.
It sure looks like the RBNZ would not want that - so, the pressure is really on for it to back up the banks' mortgage rate rises with an OCR hike, and promise of more to come.
In terms of finally reining in the housing market, that might be the best thing the RBNZ can meaningfully do at the moment.
DTIs to the rescue, maybe eventually...
Separately, it still has ambitions of getting debt-to-income ratio measures introduced into its 'macro-prudential toolkit'.
But the FHBs remain a serious sticking point between the RBNZ and Finance Minister Grant Robertson.
It could well be that sooner rather than later we will see the central bank turn to the idea of the 'interest rate floor', which apparently could be implemented quite quickly.
Essentially that would be a formalisation of the process by which banks run mortgage applicants through 'test' interest rate levels at higher levels than prevailing rates to ensure they can handle increased payments. The interest rate floor idea would see the RBNZ setting a standard 'floor' rate for the banks to do those tests with.
The RBNZ will be very concerned if house price inflation doesn't start to abate soon.
The bigger the bubble gets, the nastier if could be for everyone if it bursts.