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.
The housing sales figures for June and the new mortgage figures for the same month show a housing market no longer boiling, but certainly still simmering vigorously.
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.
Seeking stability
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.
61 Comments
If the RBNZ & other economists and politicians think this is a headache, leading the world with rate rises is beyond stoopid and NZ is heading for a Migraine that will last for years with a likely catastrophic collapse in asset prices when the world hits recession or depression accompanied by stagflation. A short while ago Wells Fargo without notice ceased all revolving credit and required repayment or conversion to a term loan, WF is a giant bank with much mortgage and personal credit exposure so what are they seeing that's hidden from joe public?? Next we see US Banks repaying repo money back to the Fed, could this be the lead indicator of a liquidity crisis??
Reverse repo’s also another example of financial trickery taking place in the financial markets….. Imagine if something triggered a financial meltdown this year. The price of everything would fall off the cliff forcing us to basically start again. New financial system, new political system, new ways of building businesses and trading with each other…. So it might not necessarily be a bad thing?
RBNZ has a wide mandate including employment, financial stability, ensuring a sound and efficient financial system, price stability etc. The fact that all we really talk about is OCR/CPI should be some forewarning that RBNZ is struggling to balance it's objectives equally. If we just wanted the OCR to chase CPI we could do that better using a computer to set the rate. We employ people because they have the ability to exercise cognitive ability and make judgements, it's also why the mandate is far wider.
In regard to OCR/CPI targeting I'm reminded of Goodhart's law:
“When a measure becomes a target, it ceases to be a good measure.”
Is CPI even the most relevant measurement of peoples financial well-being on New Zealand? Ultimately that's what it should all be about, right?
You are absolutely right, but these shameless creatures will again come on podium next month & make sure property market increase at least 20% next summer & no one will be able to do anything.
https://www.nzherald.co.nz/business/housing-eight-in-10-new-zealanders-…
I think they're partially trapped because of the policies of other central banks. We'd kill our export sector if we had a high exchange rate in comparison with just about everywhere else.
Although, that doesn't excuse them from leaving it as is without even the slightest amount of thought maybe the housing market (and general economy) is overheating. The housing problem was awful pre-Covid, now it's ludicrous.
A 0.25% increase of the OCR next month would be insufficient and ineffective, and it would not solve any of the issues highlighted in this article. Markets are already almost fully pricing such OCR increase, so it would be ineffective in starting to normalize interest rates levels.
Orr must increase the OCR by at least 50 points next months, if he wants his actions to have any traction in controlling inflation and in ensuring financial stability of the NZ banking system, threatened by the ever-inflating housing Ponzi.
There is no excuse for not fully reversing the OCR emergency cut done last year, and bringing the OCR back to 1% as soon as possible - at the very latest by end of this year.
Orr needs to go early and hard, ignoring the self-serving whining and scare-mongering of housing specuvestors, otherwise he will have to deal with an even bigger problem later on, in which case he will be forced to raise rates to an even higher level.
I thought they were trying to create the wealth effect via increasing house prices and so are succeeding - or do they have a complex split personality that requires psychiatric intervention whereby they both want something (wealth effect) and don't want something (rising house prices and mortgage debt) at the same time?
They have destroyed the village to save it.
Good analogy. But it also raises a few questions. Neo-feudalism is the economic driver 'apparently'. Everyone in the race to rent to the lowest rungs on the socio-economic ladder. Of course, that has now crept up to the 'middle' rungs, particularly among younger people.
So if you're going to burn the villages down and wipe out the turnip industry, this is inconsistent with the neo-feudalism model. OTOH, the more serfs, arguably a bigger market to rent to.
I think it transcends economics and it is really a cultural problem here in NZ. I’m sure most of us when we were looking to buy our first home were told by a parent or relative “you can’t go wrong, house prices double every 10 years!”.
There is just an expectation and acceptance amongst a high percentage of the population that house prices will rise forever, and the only people really suffering are first home buyers who make up a fairly small percentage of the population at any given time, and only until they manage to get on the ladder themselves and start seeing their own capital gains.
The strongest motivators are greed and fear, and a property bubble plays into both. You're either greedy for more sweet, sweet, capital gains, or fearful that you'll be a renter (ie second-class citizen) forever. Everyone's got an incentive to join the game, no matter how objectively stupid it gets.
With the recent huge gains we have now created a huge hole in the FHB market, if they are not already in they have now been priced out for another 5 years trying to get that new deposit. On top of that the OCR is going to go up to 1% before Christmas, you can bet the house on it.
You are right it is a cultural problem. A generation has heard legends from a parent or uncle or someone they know who made hundreds of thousands of easy money on housing.
Eg "a guy at work had 2 rentals in such and such suburb he sold after 4 years and made 500,000" etc. These legends (well in fact true) are ingrained in well 2 generations of kiwis now, the model is thoroughly trusted and tax free. Easy money is the best.....
If there were no external factors I feel like we would already have seen a rise in OCR. Given that what the larger economies do limit NZ's ability to change, if Orr is going to step in on housing it will be with a tool such as DTI. That specifically would limit FHB's ability to join the house ownership club. Investors have already been dampened, so what's left? I wonder if we will see an attack on access to interest only loans? Time will tell.
Sometimes; if you can't fix something, the best option is to destroy it, then learn what you can from what happens?
The consequences that are stretching out in front of the status quo may well be worse.
We may well end up with similar consequences only worse because we are dragging things out.
The title reveals one of the largest parts of the problem. The responsibility really rests with the government(s) who have successively looked the other way and done everything they can to lay the blame elsewhere.
I think you are onto something with your comment Chris-M. Destroy it…. With all the debt that has built up over the last few months especially in the US, destroying the existing financial system and pressing reset might be the ultimate end game.
The bull walks up the stairs but the bear falls out the window.
If you made a dollar, every second, it would take you 32 years to reach $1 billion.
But it would take you another 31,000 years before you reach $1 trillion....
The FED’s balance sheet is currently $8 trillion dollars and rising.
All that QE and not QE and any more QE that CB’s issue cannot be repaid.
I would not be that generous. It would only reward the wrong people. I.E. the speculators who have racked up the debt and selfishly screwed a generation of young people in the process.
If I were in the position of a government playing God, I imagine that you can just about do anything. I would:-
- Let the occupants of houses stay put pending sorting out the mess
- legislate a temporary rent freeze
- Let the banks go broke and take possession of them.
- restructure the debts of home owners and individual single farm owners on a prorata basis of how much the property values have fallen since you bought it. I.e. if the value halves from your purchase price, the mortgage halves. To be clear if you bought it 15 years ago and the value has risen 120% then suddenly falls 50%, it is still worth more than you paid, so the mortgage remains the same.
- the productive sector debts should remain fairly secure as they are tied to real stuff
- leave the property speculators and corporate farmers still responsible for their debt.
- once they default on their debt, where possible offer the properties of property speculators for sale to the occupants at new and realistic values on any basis that can be made to work, I.E. outright sale, rent to own
- The rest, take into housing corp at bankruptcy purchase prices. Same for corporate farms. Sell off at reasonable prices over time to owner occupiers
- Put a moratorium on foreign purchase of NZ assets and permanent ban on foreign purchases of NZ land or land based assets.
I really like the suggestion. The problem with the situation we are in now is that if house prices don't drop a lot, then non-homeowners are screwed. But if they do drop a lot, recent purchasers are screwed. Neither groups deserve to be screwed. They didn't cause the mess, and they didn't benefit from the mess at the cost of others. Your solution seems like they only way of resolving things so we don't have to screw over at least one of those groups.
By utilitarian standards the smaller group should be screwed to save the larger group. So screw those that were silly enough to buy recently to save current and future homebuyers, and the culture of our country. People can be compensated for their OO home perhaps.
Your sentiment is admirable and right but how do you create a housing cost lower than the market without market prices changing to match - why would a buyer purchase an existing house at a higher price than a newly built one.Ultimately the market itself will fix the problem and there will be casualties.
what now? was the reserve bank really surprised when house prices leapt 30% when they flooded the market with cheap money,and did they really need to conduct a study to find retired folks with no mortgage were most affected by TD rates dropping to sub inflation?the skills shortage must be causing delays and they are having trouble finding consultants to tell them what to do next.
If you still wish OCR to stay the same or lower for a while, I suggest that you ditch that thought and come back to reality. Inflation is not going anywhere, it will just get worse. RBNZ will be forced to raise OCR. It just matters whether they are going to slowly raise it now or raise it sharply later...
"Housing: Rental prices blast off to record high after flat few months"
https://www.newshub.co.nz/home/money/2021/07/housing-rental-prices-blas…
"Quarterly inflation rising steadily in New Zealand across the board - Stats NZ"
https://www.newshub.co.nz/home/money/2021/07/quarterly-inflation-rising…
"Leading economist predicts potential Reserve Bank to increase Official Cash Rate to 0.75pc"
https://www.newshub.co.nz/home/money/2021/07/leading-economist-predicts…
I agree. It seems some people have decided that the current OCR is the new norm and will remain in place indefinitely. Short memory I feel, however they can only hide under the blankets for so long. The reasons for our rising inflation are clear to see and no amount of wishful thinking will turn the tide.
And property investors need to be reminded that the value of your investment can increase AND decrease. Too many believe they cannot lose and that any increases in costs that detract from their profits can be passed on to the tenant. So family choices will be pay the landlord or eat/service the car/heat the mouldy rot box?etc…… Not on. Not sustainable. And if they push too hard there will be riots on the streets.
If you still wish OCR to stay the same or lower for a while, I suggest that you ditch that thought and come back to reality. Inflation is not going anywhere, it will just get worse. RBNZ will be forced to raise OCR. It just matters whether they are going to slowly raise it now or raise it sharply later...
"Housing: Rental prices blast off to record high after flat few months"
https://www.newshub.co.nz/home/money/2021/07/housing-rental-prices-blas…
"Quarterly inflation rising steadily in New Zealand across the board - Stats NZ"
https://www.newshub.co.nz/home/money/2021/07/quarterly-inflation-rising…
"Leading economist predicts potential Reserve Bank to increase Official Cash Rate to 0.75pc"
https://www.newshub.co.nz/home/money/2021/07/leading-economist-predicts…
There is a myth propagated by both Labour, National and MSM on the independence of the reserve bank from the govt. It is partially correct. The govt via Robertson can do far more via a remit and Order in council than he has done up to now. Without reading the Act again, the use of DTi could have been given a bigger kick start from Robertson, once he had agreed to it as another tool in Orr's toolbox. Robertson is quite happy not to push things for fear of having to take the repercussions in taking more decisive action.
"The housing market is the headache that won't go away for the Reserve Bank"
This headache is by choice and are happy with it as it suits their narrative otherwise how hard is to control it specially speculative side of the demand.
Even when doctors give strong medicine in emergency takes precaution by given extra medicine / vitamins to control the side effect of antibiotic medicine that has to be given in crisis.
Low interest rate was antibiotic but why did they feel the need to remove LVR as need was to protect existing house owners with low interest and extra dose of mortage holiday but their was no need to promote speculative demand by removing LVR.
ALSO if you did provide dose of medicine to promote housing market, to avoid side effect could have stopped interest only loan for buying new house but went all out with least regret
AND
Even after realising the damage instead of taking action went with wait and watch.
So this may seem to be a headache but in reality .......
Its not panic its common sense, why wouldn't you want to dump that old rental that you paid off years ago onto a housing market at its very peak ? Its time to cash it in, the government is just making it harder and harder to run a rental and tenants are a total pain in the ass and you simply cannot be bothered with them in later life. Time to bail out and take the 30% more beans you just made in the last year alone off the table. Hasta la vista Baby.
MLS - Interesting times we live in, and of course we all have our own opinions which only time proves correct or not.
House prices have increased dramatically over the last 12 months but there is no correction on the way, rather a flattening sometime in the next 3 years, with always a possibility of a marginal drop.
Affordability is at a record level due to low interest rates, in most cities it is cheaper to buy than rent.
Whilst there will be a rise in interest rates sometime in the next year or 2 which obviously will have a dampening effect, it is confidence in the market that keeps it buoyant.
The employment market is very strong, fortunately our goods we produce are in high demand around the world, giving us currently a record terms of trade even with shipping bottlenecks and a shortage of containers.
The DTI tool that gets air time is just another red herring, the last time the DTI was a ratio if 3 interest rates were 18%.
Interest rates are certainly low and will raise say 2% but the days of high rates are historical, from the days of fighting inflation, initially kicked off by oil price shocks of the 70's.
With a buoyant economy, rising construction costs, future appreciation will occur rightly or wrongly.
The term 'bubble' has been used for atleast 50 years in my life, and unfortunately those whom I know who waited for it are still waiting and are in a poor position, retiring as renters.
I'm not trying pump the market, rather put some logic where the market is and why.
The market has survived the GFC, and a world pandemic all within 12 years, it is firm and will remain so for the foreseeable future.
Here's the long term history of interest rates...
https://s3.amazonaws.com/agorafinancialwebsite/wp-content/uploads/2018/…
These are not 'normal' times...where we find ourselves is in uncharted territory. I'd be more likely to say that anything could happen from here!
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