Rodney Dickens says the Reserve Bank has opened Pandora’s Box and nothing good will result; says new LVR rules are unjust

Rodney Dickens says the Reserve Bank has opened Pandora’s Box and nothing good will result; says new LVR rules are unjust

By Rodney Dickens*

Between 2001 and 2004 the average mortgage interest rate charged by the major banks averaged 7.3% compared to an average of 8.9% between 1992 and 2000 (see the top left chart below that has the 2001 to 2004 period highlighted).

This was largely as a result of an experiment with low interest rates conducted by the Reserve Bank (RB).

The average mortgage interest rate charged by the major banks was highly correlated with the OCR in this period, as shown in the top right chart.

Despite the extremely strong surge in net migration in 2001 shown in the second left chart and continued high net migration in 2002 and 2003, the RB largely continued with the experiment with low interest rates.

Reflecting the risk that the RB had overly stimulated the housing market and economic growth, Acting Governor Carr implemented four 0.25% OCR hikes in 2002, but these were largely reversed by Governor Bollard in 2003.

Sustained low interest rates and the above average population growth driven by the strong net migration is the perfect recipe for a speculative bubble in the housing market.

National annual house price inflation peaked at 25% in 2003 and averaged 15% between 2003 and 2007 based on the QV median house price (right chart above).

A speculative bubble occurs when the price of an asset gets way too high relative to the income stream the asset will generate in the future.

The adjacent chart below shows this in the context of the national average house price having got way out of line with the national average annual gross rental income during the 2003 to 2007 mega-boom in house prices.

This has resulted in a large fall in the national average rental yield, with major negative implications for the medium-term outlook for house prices, as detailed in the Housing Prospects reports.

For information on these reports use the this link to our website - while the this link is to a report that reviews our 100% track record at providing clients with advance warnings of upturns and downturns in the housing market.

The magnitude of the experiment with low interest rates conducted by the RB in the early-2000s is better revealed when we compare like with like.

When net migration was last high in the mid-1990s, the RB’s actions ensured much higher mortgage interest rates than existed in the 2001 to 2004 period.

Between 1994 and 1997 the average mortgage interest rate charged by the major banks averaged 10.1% versus the 7.3% over the period the RB experimented with low interest rates in the early-2000s.

Having played a major part in fuelling the speculative bubble in house prices with the low-interest-rate experiment, the RB responded by delivering thirteen 0.25% OCR hikes between January 2004 and July 2007.

By letting the speculative bubble in the housing market go so far before acting the inevitable consequence was large interest rate increases, just as I had warned clients would occur when I was Head of Research at ASB during most of this period.

Governor Wheeler has acknowledged this risk and pointed out that if the RB allowed the housing market to get too much of a head of steam up again the result would be more severe increases in interest rates than the RB is predicting.

Having made such a major blunder in the mid-2000s the RB and the new governor are very keen not to repeat the same mistake even though they are already somewhat behind the ball.

But at least this time actions are being taken before annual house price inflation exceeds 10%, while Governor Bollard didn’t start to hike in January 2004 until after annual house price inflation was above 20%.

It is more than just low interest rates that are driving up house prices

The robust increases in the national average house price over the last couple of years is a result of more than just low interest rates and, more recently, improved population driving higher demand.

In the last six months the number of dwelling sales reported by REINZ has averaged 6,875 on a seasonally adjusted basis. This is 35% below the peak six month period in 2003, when there were 10,542 sales per month on average, while recent experience is well below the peak level experienced during the boom in the mid- 1990s when six-month average sales peaked at 8,295 in 1996.

Just as existing house prices are still in speculative bubble territory compared to rents (see page 2), section prices have not fallen back to affordable levels following the 2003 to 2007 mega-boom (left chart below).

In the case of Auckland, the situation is even more extreme with the median section price reported by REINZ having headed well above $300,000 in the last year. Rising section prices are at the heart of the problem, but a range of council and government policies have made new housing unaffordable for a large group of would-be new home owners (e.g. double glazing and scaffolding).

As a result of the major affordability problem with new housing, the national level of house building has been low for the last five years, while reflecting the greater affordability challenge in Auckland it has performed much worse in terms of the level of consents for new dwellings (right chart below).

The low level of house building has contributed to a much tighter demand-supply balance in the existing house market than can be attributed to low interest rates stimulating demand.

The government’s housing initiatives are designed to deal with the supply-side problem, but not quickly enough to solve the challenge the RB faces.

The actions by the RB and the government housing initiatives have major implications for the medium-term outlook for house prices, as discussed in the Housing Prospects reports.

But the focus here is on the route the RB is taking to achieve the cooling in house price inflation rather than the medium-term outlook for house prices or how housing in general stacks up as an investment option.

The Reserve Bank has opened Pandora’s Box and nothing good will result

The bank lending restrictions that start tomorrow are discriminatory, divisive and will impose what economists call a “deadweight loss” (i.e. the costs of the intervention will exceed the benefits).

Adding to the divisiveness, the RB appears to have raised the possibility of targeting investors as well as low deposit borrowers.

People understandably see the lending restrictions as unjust and will find ways around them, albeit at a cost.

Even the Bankers’ Association (BA) is making suggestions of how the restrictions can be overcome.

Directly along the line of what the BA is suggesting progress is being made by real estate agents in parts of the country working with finance companies to provide sources of deposit money.

Australian-based and other non-bank lenders will be major beneficiaries.

If the history of intervention repeats itself, people will find ways around the original restrictions, the RB will respond with more restrictions and an unnecessary and expensive roundabout of action and reaction will play out until sanity eventually prevails.

Of course, the alternative to discriminatory and divisive lending restrictions is a few OCR hikes that impact on all borrowers.

If as I and many others expect, the lending restrictions ultimately get circumvented even though they could bite a bit initially, OCR hikes will eventuate anyway.

Early hikes are much better than belated ones that increase the odds that more hikes will be required. This is something Governor Wheeler and I agree on.

However, don’t underestimate the desire of a new governor to try a new experiment.

It could take some time before sanity prevails and the lending restrictions are relegated to the same forgotten corner in history as the Monetary Conditions Index the RB experimented with in the late-1990s.

Of more direct relevance or comparison is the raft of bank lending and other restrictions Muldoon implemented in the first half of the 1980s that caused lots of distortions and extra costs, and at the peak culminated in around 40% of all mortgage lending being conducted via lawyers’ trust accounts that were outside the regulatory net. Just as relevant are the temperance laws that proved to be abysmal failures.

Policies that are seen as being unjust are doomed.

But Governor Wheeler is willing to try the new experiment in the hope it will work enough to be worth the disruption, injustices and costs it imposes on a select group of people.

And in the misguided hope it will help by keeping the exchange rate lower than would be the case otherwise.


*Rodney Dickens is the managing director and chief research officer of Strategic Risk Analysis Limited.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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When I saw the headline  .. RBNZ... mistake ... I thought  here we go, some nutter having a go at the RBNZ .
But I must say Dickens piece is well researched and has a well supported argument , although I dont necessarly agree with all his points.
I do think the immigration policy which is targetting rapid GDP  growth ( migrants bring cash, skills and contribute money  to the tax poo)l, is part of the problem . 
That we have this ridiculous number of migrants arriving at Auckland Airport every day , and nowhere to house them is a major policy flaw .
I also agree that intervention in any free market causes unintended consequences , and exempting first time homebuyers will compound the problem .
I disagree with the suggestion that the requirement that people save a deposit is discriminatory or divisive . We had to do this to own our first home  , and it was bloody hard going.
Now the GenX wanting everything now on the credit card , must realise that their obsession with instant gratification is not always going to wash in the real world

Of course there is more to life than instant gratification.....just not right now!

If i owned a bank i would be thrilled to bits with the new lvr rules.
For one it would show me that the people borrowing the banks money have made a very good attempt at saving and possibly sacrificed some of lives pleasures to do it.
Secondly i would know that if their house has to be sold at a mortgagee sale the banks not going to take a bath.

But last decade the Reserve Bank was directed to target CPI which included rents but not house prices. So did the Reserve Bank make a mistake or was the mistake the foolish faith in a narrowly defined inflation target?

It could take some time before sanity prevails and the lending restrictions are relegated to the same forgotten corner in history as the Monetary Conditions Index the RB experimented with in the late-1990s.
Yes. The passing of the 2014 election? - casting a fig leaf sized veil over the outrage of moral hazard imposed by restraining the OCR at an "emergency" setting, over such a protracted period, must count as one of the worst of many faulty RBNZ acts. Central bank governors know no shame.

Central bank governors know no shame.
Maybe they simply mirror the general community.

Yes, you are more than likely correct. Shame must rest with the government for failing to engage the public prior to the last two elections to seek a mandate for such actions. We are increasinging enveloped by such deficits of democracy.

With expert commentary like this no wonder we have kissed our local manufacturing goodbye
We kissed our local manufacturing goodbye for the same reasons Apple originally secured Foxconn to manufacture iphones @ US $ 49.00 per unit.
Interest rates must always be viewed in a global context
Our debt per capita levels places NZ in a high risk borrowing category - hence the greater risk premium attached to our borrowing costs - it would be decidely higher if it weren't for the US Fed's actions distorting interest rates levels downwards.
Bernanke's recently expressed concern with tighter financial conditions rather than the mandated economic factors can only lead to greater malinvestment. undertaken by over enthusiastic borrowers.

What an elaborate web you weave.

Zanyzane, Stephen is correct. It is the low interest rates and the speculative malinvestment that they cause that ruins the economy. Like many others I think Hyman Minsky nails the destructive malinvestment/credit cycle with his financial instability hypothesis.
I don't understand why you can't see depositors would attach a higher risk and thus demand higher rates from a small financially exposed nation like New Zealand, unless you believe Bill English's tripe that NZ is a safe haven. Next financial crisis and NZD will go below 50c again whatever our interest rates.

Its your opinion Stephen is correct based on Minsky? While I agree with minsky, I do not agree that its low interest rates as the cause. So yes mal-investment, sure...but that happens in the boom, low interest rates are used to try and head off the bust, after the over or mal-investments have have failed.
Sure depositors can ask for higher rates, then its a case of who blinks first...otherwise take your money elsewhere is your option. Now if you mean foreign investors, that is exactly of course what happens...OAPs etc dont, hence they are price takers.
50cents NZD, yes, even 40cents...

but that happens in the boom, low interest rates are used to try and head off the bust, after the over or mal-investments have have failed
Why then are world's stockmarkets at or near record highs while interest rates remain anchored at immediate post GFC lows?
It is also notable US private wealth is at record levels according to the recently released Fed Z1 data.Read more
While Credit and economic growth may be relatively restrained, perceived Household wealth is going gangbusters. Household Sector Assets increased another $1.343 TN during Q2 to a record $88.369 TN. Household Assets were up a notable $7.692 TN, or 9.5%, over the past year. Over two years, Household Assets inflated $13.389 TN, or 17.9%. Since the end of ’08, Household Assets have jumped $16.921 TN, rising from 498% of GDP to 530%. Meanwhile, Household Liabilities were little changed both during the quarter and over the past year at $13.548 TN. Since the end of 2008, Household Liabilities have declined $686bn, or 4.8%.

Household Net Worth (assets less liabilities) has become a focal point of my Macro Credit Analysis. For the quarter, Household Net Worth inflated another $1.342 TN, or 7.3% annualized, to a record $74.821 TN. At 449% of GDP, Household Net Worth is within striking distance of the record 470% of GDP back at the 2007 peak of the mortgage finance Bubble. Over the past year, Household Net Worth jumped $7.690 TN, or 11.5%. Net Worth rose a notable $13.388 TN, or 21.8%, over two years. In arguably the single most pertinent macro data point, Household Net Worth has surged $17.607 TN, or 30.8%, since the end of 2008.

It’s worth our time to dig just a little into the composition of Household Assets. At the end of Q2, Financial Assets accounted for 70%, and Non-Financial Assets 30%, of Total Assets. This compares to a 65%/35% split at the end of 2008. In nominal dollars, Financial Assets increased $15.237 TN, or 33%, since 2008, while Non-Financial Assets gained $1.684 TN, or 7% to $26.516 TN (Real Estate, at $21.123 TN, comprises about 80% of Non-Financial Assets).

Even more striking is the growth divergence between Household Financial Assets categories since 2008. In particular, safer “money”-like holdings have notably lagged the historic expansion in “risk assets.” Total Deposits (bank and money market), the bedrock of perceived safe and liquid “money,” increased $982bn since the end of 2008, or 12%, to $9.026 TN. Treasury holdings rose about a Trillion to $1.2 TN, and agency securities increased $597bn to $1.65 TN. In total, deposits, Treasuries and agencies rose $2.58 TN, or 28%, to $11.865 TN.

Meanwhile, since ’08 Household holdings of mutual funds and equities have surged $10.640 TN, or 85%, to $23.191 TN. Pension Fund Entitlements jumped $4.675 TN, or 33%, to $18.737 TN. It’s no longer true that American households have the majority of their wealth in savings and real estate. These days, and much the product of experimental monetary policy, Household perceived wealth is wrapped up in the risk markets.
Why should interest rates not revert to historical levels consistent with these reported ground breaking higher economic values?

lets say "in the old days" over and mal-investment refered to businesses and not finance.  So businesses are not growing, un-employment isnt doing much, yet as you say the gamblers are out "investing" in shares and commodities.  Hence really its lack of effective regulation in part at least....Now lets look at those shares, the P/E ratios are insane, its really tulip mania and its going to pop.
These ground breaking values are la la land make believe IMHO....main street is still at best in the doldrums while wall street gambles with other ppls money.
"why" I would have thought the answer to that was the real world where goods are made, all is not well. Its also going to get worse and at some point the make believe gains on wall street are going to crash aka 1929.
Time to jail a few me thinks.

lets say "in the old days" over and mal-investment refered to businesses and not finance.
Too late, we are totally financialised in every aspect of our being. 
ACC just pulled a financial rabbit out of a NPV hat.
Ms Rebstock said the surplus was mainly due to three factors:
* Better performance by its rehabilitation services returning claimants to fitness which reduced estimated future costs by $1.2 billion.
* Rising interest rates which reduce the current value of future costs by $1.2 billion.
* Investments generating $920 million more than predicted due to recoveries in local and overseas markets and the performance of its investment team.
Chief financial officer Mark Dossor said the corporation's investment fund returned 9.9 per cent, or $2 billion in investment income almost twice as much above budget. Read more
BNZ took a loss on higher market to market value of it's not insignificant covered bond liabilities in the year ending 30 September 2012 - when covered bond yields were wider to sovereign debt the bank owed less than the par value of the debt and could add that to it's P&L. Corporate yield compression caused the opposite, thus previous bond prices reductions counted as gains had to be returned.
The bank's General Disclosure Statement (GDS) for the year to September shows net profit after tax of NZ$52 million in the three months to September 30, down from NZ$285 million in the same period of 2011. The fourth quarter saw BNZ book a NZ$191 million loss on gains less losses on financial instruments at fair value. That compares with a gain of NZ$197 million in the same period of last year.
A BNZ spokeswoman told the main reason for the loss on financial instruments this time around was due to fixed interest rate debt issued by the bank, where BNZ credit spreads have contracted "markedly" during the year. She said the main drivers were the bank's €1.5 billion worth of covered bonds issued, plus an unsecured €750 million debt issue, and two smaller Swiss franc issues.
BNZ was the only one of the big four banks not to post record annual net profit after tax this year, with its profit falling NZ$91 million, or 14%, to NZ$580 million. As of September 30, BNZ had covered bonds on issue with a face value of NZ$4.275 billion, which is significantly more than the other banks. The covered bonds are secured by housing loans and other assets valued at NZ$5.467 billion. Read more
All corporates derive a portion of their eanings in this manner, some more than others - the tricks are various and can be more lucrative than manufacturing or whatever else the company was originally mandated to undertake on behalf of the owners.There is no room to accommodate the personal needs of main street employees. Hence they don't.

I agree....hence the Q is, whats going to be done about it.
because I think something will be done.

Only the citizens can bring about the necessary changes - but thinking will not cut it.

For the Graph "REINZ dwelling sales & Net[t] migration", the correlation is stronger if you look at money coming to live in New Zealand rather than people coming to live.

A comment made on this site a while back is probably a good step in the right direction. Make mortgages for third or more homes be charged at commercial rates. This should put the brakes on some investors and let in some of the others.

The bank lending restrictions that start tomorrow are discriminatory ..

To discriminate is not automatically a bad thing. To discriminate can mean to make clear judgement between things, to draw a correct line, an extremely useful skill when you have competing or conflicting goals that need balancing.


That such a process divides is its nature. Sometimes calls need to be made if we are not to get paralysed, as governments so often do, in the swamp of pleasing everybody.


Even the Bankers’ Association (BA) is making suggestions of how the restrictions can be overcome.

This is simply a statement about bank morality.



Markets do not exist in some kind of magical vacuum land. Regulations exist that create and police any marketplace and these RBNZ changes are little more than different regulations for the market.

Great comments. I love it when people call it as it is.

Isn't the RB caught between a rock & a hard place a bit? Our interest rates are currently a fair way above many other coutries, which has caused a lot of money to flow into NZ, increasing the exchange rate, hurting exporters, and inflating all asset values (shares & property) as it has to go somewhere...
If they raise the OCR just to cool the housing market, won't that cause even more money to flow into NZ, seeking good returns, causing an even higher exchange rate, and more asset value inflation (house price rises)
Isn't this what has lead to the RBNZ to look at other tools for controlling the commercial bank's risk exposure from residential property?

Yes that seems to be the conventional outlook/expectation.
Businesses also apparently rely on low borrowing costs to stay afloat, so raising the OCR will make like even harder for them. 
In terms of cooling the housing market, that would be an overall effect as well, so it may have little impact in some areas of Auckalnd where ppl are going crazy but a huge neg impact in quieter, rural (say) areas.
There are other risks as well as residential, farm lending for instance....really its all a bubble and popping it is going to make a mess....deflating it slowly an art form that I wouldnt bet on...

Banks will only "accept" overseas deposits if they have a demand for loans or if they need the money for liquidity in a crisis. They're not a public service depository. The LVR restrictions and other prudential measures proposed should reduce demand for credit discouraging the banks from seeking more overseas money. In normal calm times excess deposits are a liability and banks will discourage them (as they affect profit), possibly with lower deposit rates. Reducing credit demand should reduce the exchange rate

"Reducing credit demand should reduce the exchange rate"

No, I don't think so. At present unemployment is only really a problem for low income earners. High income earners are rocking and rolling and the outlook is sweet. This LVR policy will further widen the gap - those already in property can keep on buying and those not, well they have bigger things than not having a 20% deposit to worry about - like putting food on the table, paying the power bill, getting a job! etc. etc. 


The RBNZ just can't win, but being a bunch of woozies doesn't help. We need to cut the knot of low interest rates leads to overpriced housing but high interest rates leads to too high an exchange rate. Surely it can't be that hard if we actually want to. The RBNZ need to grow up and implement and recommend some real changes, such as:
1  Limit loans to 100% of deposits.
2  Make interest non deductible as an expense ( it is technically a capital cost not an operating expense anyway).
3  Charge GST on interest ( we charge GST on bread but money is exempt).
4 Put interest rates up so that debt growth is held below nominal GDP growth.
5 Separate the payment system from the loan system and from merchant banking. Separate businesses.
We have allowed a banker friendly rachet of concessions and ideas over many years to poison our society. Banking should be a good thing. In our desperation to borrow as individuals and collectively via local and central government we have created a monster.

I summarised the proposal here. Banks can still make high LVR loans but the deposits must exist prior to the loan, not created by the bank in making the loan. The proposal removes the OBR and "too big to fail" from the equation as well.
The original sources
Is it easy to understand or would it be easy to implement? No. Huber and Robertson have an apt quote from Machiavelli:
There is nothing more difficult to execute, nor more dubious of success, nor more dangerous to administer, than to introduce a new order of things; for he who introduces it has all those who profit from the old order as his enemies, and he has only lukewarm allies in all those who might profit from the new. This lukewarmness partly stems from fear of their adversaries,.. and partly from the scepticism of men, who do not truly believe in new things unless they have actually had personal experience of them.

Yes, exactly. The problem with change is it  benefits no one in the short term. My business is organised on the basis of how things are, so I borrow more than I otherwise would. The changes I suggest (and they will be full of inintended consequences and quite possibly disastrous, who can say?) would mess up my own arrangements precisely because I am not set up for them.

Yes unfortunately why real change only comes from a crisis, real or manufactured. Can be used detrimentally as well. The financial elites have been using manufactured crises via overlending and then IMF structural adjustment programmes for decades to get at the assets of countries, especially in Central and Latin America. Rogernomics was implemented off the back of a manufactured exchange rate crisis here in 1984.
Any radical change involving regulation of the banks and possible public credit would invoke the real or perceived threat of the "markets". Key and English use this fear all the time. Fear of the markets and the unknown is how the status quo is maintained. Total meltdown is the only time no one has anything to lose.

There is a prerequisite for money independence and that is energy independence. We import more than 50% of our energy needs and we need $USD for that. So question then becomes who is going to convert our funny money to $USD?

Drll baby, drill. Yes I agree. We produce too little oil and it makes us dependent. The anti drillers are quite right to fear too much or incompetent drilling, but those are not the current problems we have.

So what do we or children do for an economy when we have drilled out what little oil there is here?
Interesting that you and others dont seem to contemplate the moral aspect of using up all of a one time resource in one generaion. 
So the second Q is once we have drilled out the oil to buy ipads etc, where will our chidren get the energy from to a) keep going  b) migrate to the (pathetic) alternatives?
Because what you are dooming our children to is a 1750s world, except far more weather /climate unstable.

"Because what you are dooming our children to is a 1750s world, except far more weather /climate unstable"
I see the problem, but you seem to be advocating we go there directly. Presumably you see something I don't.

Totally agree Scarfie. But if a government wasn't afraid of being called "nanny state" it could encourage individuals and businesses via graduated registration charges and gas guzzler import taxs to buy only small engined cars (even a 2 litre diesel can tow a decent size boat) and ramp up the energy conservation campaign. Personally I've switched from a big BMW to a smaller Toyota and halved my fuel consumption with no loss of utility apart from ego :)
Oil is the big potential inflationary import with a lower dollar. The consumer goods don't realy matter and many have potential local substitutes or could have again.
Funny money is a pejorative term and somewhat ironic considering how most "money" is created now

Yes. A Corolla diesel is a great car if you really have to use one. But my longer term preference by both a design and resource perspective is the absence of cars from daily life. Think of it this way, when I was a kid we used to play ON the road, you can't do that now.
There is very little reason to have cars in our daily activities except for poor design choices of the past based on the assumption energy would remain cheap and plentiful forever. So graduation away, absolutely. Start 40 years ago, it isn't like we didn't get some warning with the oil shocks/crisis at that time.
As for funny money, well it is okay to wear sandals and a kaftan as long as you know you are doing so :-P

If the bank lends out your deposit at 1 to 1 and we have a housing price collapse then the banks are insolvent and bankrupt and  the OBR functions in the same way....
Hence the OBR is independant of the leverage and is necessary. In fact since the banks cant "re-capitalise" since we cant use leverage the OBR might be even more necessary....

I believe Roger is recommending that banks would only be able to issue an amount of loans equal to the money they have on deposit, rather than issue loans and seek funding after the fact like they do now.
With an increase in revenue from removing the deductibility of interest, the government would could actually provide subsidies to landlords or as is my preference, increase the social housing stock and generate further jobs in construction.. Good idea.
As for your objections to imposing a GST on interest, I hardly think that, increasing the complixity of our banking system is hardly a reasonable reason to exempt it, thus conferringg financial services a unfair advantage over other forms of commerce. We need a fair and balanced tax system, which delivers equitable outcomes. Not the distortionary monster we have today.
In my view the greater problem is global banking regulations like the Basel Accord which has skewed bank credit management towards housing, because real estate loans before the subprime crisis, were considered of much less risky. Perhaps with banking regulators now realising that property bubbles are a systemic risk to the financial system, perhaps it could be seen this is not a good idea.
"Because loans secured over residential property were seen to be less risky than other loans, they only had to have 50% as much capital."

"Because loans secured over residential property were seen to be less risky than other loans, they only had to have 50% as much capital."
There is an updated version of an official RBNZ PDFoffering an even lower risk weighting for residential property mortgage assets. Page 47 of 108 declares 35% is good enough if the LVR is <80% and mortgage insurance is in place. And we all know how well the later works when the unexpected actually visits.

Yes, I forgot that one. Well within the reach of the RBNZ if they were serious about doing something useful.
Also, why not have an inflation target of -2% to +2%? Mild deflation is no more a problem than mild inflation now that government bond buying is no longer taboo.
On the subject of removing the tax deductibility of interest as an operating expense the additional cost to business can be offset by a reduction in tax rates. The objective is not to increase government revenue but to get rid of the large incentive to fund with borrowing rather than with equity or savings ("retained earnings" in accountant speak). This should result in more stable businesses (eg Solid Energy fiasco where an abusive owner loads up the business with too much debt) and closes a loophole for the extraction of profits by foreign multinationals.
Equally, if you want to sort unemployment just reduce the company tax rate to 15%. Aussie office jobs would be sent over pdq. I found it intrigueing that the Irish went to great lengths to stop the Germans from making them put their company tax rate up - the Irish know this is where their export jobs come from. Presumably we don't want jobs here.
My main point is there are lots of good things to try. This weak wishy washy "there's nothing we can do" is just pathetic. The fact is there is nothing they want to do. Having seen Labour's disgraceful arrogance towards the RBNZ I can see why. Good on them for saying no to John Key.

On the subject of removing the tax deductibility of interest as an operating expense the additional cost to business can be offset by a reduction in tax rates.
I think that this one simple idea would transform our economy......It would reverse the growth of the banking sector.
I disagree about company tax....     I  prefer  the idea of making the ist $20,000 of income tax free.  ( or whatever amount is viable ).
In terms of Multi Nationals...  if they earning income here... they should pay a common sense level of tax here. ie.  alot more than they are

One easy way for a multinational to move profits offshore to, for example Ireland, is to loan a large sum to the NZ subsidiary at whatever the IRD think is a fair rate of interest. The interest is treated as a tax deductible expense here but it also serves as a mechanism to have profit show up where you want it to.
The point about having a low rate of company tax is it attracts the Google's of this world to be headquartered in ...Ireland. We don't want their sort here for some reason, as you yourself attest. Why is that?

Brilliant article on Ireland. Fascinating insight into what went on, and funny too.

He's a very good writer. I read his book Boomerang a few weeks ago that included this article as one of its chapters. He also looked at Iceland, Greece, Germany and the US. His stereotyping of different nationalities is very funny.
He is perhaps toughest on his fellow Americans, concluding that the 2008 economic meltdown stemmed in large part from “people taking what they can, just because they can, without regard to the larger social consequences.”  - NY Times
Glad that doesn't happen here!

The root of it is always in the human heart.  But who wants to hear that when there are so many others who can be blamed and so many ways to tell others how to live.

The belief that "everybody else is doing it so I'm going to get my share" is very prevalent but can be used to justify no end of dubious actions, indeed it is at the heart of neoliberal policy that has reigned for 30 years. As Lewis noted at the end of the book, it plays to the primitive lizard part of the human brain

For u Stephen...
This is from a reserve banks speech....   shows that the OBR is more like a tax
"Let us set aside the traditional argument in favour of bank regulation - that banks are opaque, depositors need agents to monitor the bank on their behalf, and regulators can do this cost effectively. "
( anakists link above)

Hi Roelof - I responded thus when Anarkist posted this doc a while back.

by Stephen Hulme | 21 Sep 13, 6:07pm

The dogmatic hubris inherent in the current RBNZ chairman's linked speech is astonishing given the fact rating agencies claim NZ banks lend at least 140% of local deposits.
The implication being the creditors of loans above the local deposit base are foreign wholesale lenders engaged in collateralised borrowing via currency swaps and thus exempt from the demands of OBR prepositioning.
If banks operate in widely diverse international markets, if significant numbers of depositors are expected to bear losses and are treated pari passu, there is reason to hope that the privately optimal level of bank capital globally will converge to the socially optimal level. In such a world, shareholders bear expected losses while bank creditors bear unexpected losses. In such a world, the role of the regulator is to protect taxpayers, current and future, from being exploited by bank shareholders and depositors.

5 Would be the OBR method, a chinese firewall.. checking accounts are held seperate. But yes I dont see how it does much day to day.
1. A 1% change in the LVR due to leverage has a huge domino effect, cutting to 50% would destroy the housing market and NZ's economy.
2. You assume renters can pay, since I'd assume most landlords are charging the top $ already, I'd suggest increases wouldnt happen. I cant see what it achieves much, except running huge debts on day to day costs hoping to capitalise that "loss" into a capital gain tax free seems std practice, so I think it may have some merit.
3. Banking is all electronic, no biggee.
4. Agree.

As systemic risk increases...  Why doesn't the Reserve Bank force the Banks to increase the the amount of Capital they hold...???
Why bother with the OBR or LVR...etc..???
Why not simply require the Banks to hold more capital..???
This puts the "risk" squarely where it belongs...   At the feet of the owners of the Banks...
It is about Time the Reserve Bank showed us that it is ...."the peoples Bank"... ie. A Public

Yep the RBNZ would ideally increase capital requirements as part of its mandate to maintain banking sector stability but they have been happy for a long time to buy the banks arguement that decreasing their profit by raising their capital requirement would make them more vulnerable. Until the banks too big to fail financial armageddon bluff is called, it will be their standard fall back position. Fat and profitable is at the heart of the big Aussie banks and the Four Pillars policy and it extends here.
Would be interesting to see how many people would accept no interest for a 100% guarantee at a government owned depository versus leaving it where it was with no guarantee at all. Why should interest earning accounts bear no risk like any other investment?

How do you judge risk is higher?  cant see a practical way.
OBR keeps the shops open when we get the financial/housing crisis, dont you like to eat?  I do.  I dont really want to have to defend my food stock from gangs of hungry ppl.....if nothing else its a pretty violent action and I dont want to spend the rest of my life in jail afterwards either..
LVR is there to limit the housing sector without limiting other sectors that dont need it.
The risk is always with the depositors and yes shareholders, in theory...except without the OBR its the tax payer as the last stop.

You want to place the risk, yet you dont want the OBR, yet thats exactly what it achieves, ie put the risk to the shareholders and the depositors.

How does it do that..????
In terms of systemic risk...the OBR probably amplifies the likely hood of Bank Runs.....
Increasing the Capital requirements of Banks reduces systemic risk by limiting the leverage that Banks use Banks being able to take bigger losses without becoming insolvent...  as a result of lowering their leverage.
Depositholders are passive bystanders in regards to a Banks lending.  eg.How much leverage Banks uses and the quality of the loans.
It is not so much placing the risk  ...  ( the Banks do that in their day to day operations)... It is about controlling and limiting the Risks that banks take...   
Nowdays it is the Management of large companies that benifit the most ...more so than the shareholders...   
Management has every incentive to maximise short term profits... ( bonuses)
It is a shame they can't be  accountable and held responsible for the risks they take.... taking abck bonuses would be a start.

Tony Alexander:
The government is explicitly aiming to grow Auckland’s population as a means of achieving “agglomeration” benefits for economic growth which accrue from high interaction amongst economic players.

The Great Growth Disconnect: Population Growth Does Not Equal Economic Growth


Using figures from the U.S. Census and the Bureau of Economic Analysis, José Lobo of Arizona State University and my colleagues at the Martin Prosperity Institute examined the trends in population growth and productivity growth (measured as economic output per capita) for all 350-plus U.S. metros over the decade spanning 2001 to 2011.
Their main conclusion: There is little, if any connection, between the two. Roughly 46 percent metros had above average population growth, while 43 percent had above average productivity growth over this period. Here's the rub: Across the nation, fewer than one in five metros (19 percent) experienced both population growth and productivity growth over the past decade. There was no statistical association between the two, according to the team's analysis.


Yes, Malthus is much maligned. We are a country of 4.5 million producing food for 50 million. If we become a country of 50 million we will need to find a new way of earning our keep. You only have to look at a country like Eygpt to see what happens when an oil exporter grows it's population until it becomes an importer.

STOP immigration until the balance is satisfactory!
No IFs , No buts, No maybes

From memory about 50,000 leave NZ each year. 6-12 months of no replacements would correct any real or imagined housing shortage as well as mop up some of the unemployed. Number of new houses needed - zero. Cost - zero

As they say, happy wife, happy life. Unfortunately renting means unhappy wife, unhappy life.
Seriously, what's the point of living in a beautiful country if you are forever at the whim of a landlord, or worse, in severe debt slavery to a bank.
When are the younger generations going to realise they have had their country stolen from them, and a have a government and banking system complicit in doing so.
It's a roof over your head. It means you don’t get wet when it rains. I’m sad to say this, but I think most kiwi’s are “bloody idiots” when it comes to property.
NZ has never had a proper correction of property values, but boy when (not if) it does happen you can guarantee there are going to be quite some more unhappy wives, and unhappy lives.

Funny thing is we ended up renting after we sold our last house in 2008. It was a beautiful old house, the sort of thing we had always wanted. After five years we grew tired of the upkeep and decided to sell it as the storm clouds darkened (it was a bit beyond our means, you see...). Anyway, we agreed to move out at two weeks notice as that's what the buyer wanted.
So, I sent my wife out to find a rental and went entirely with her choice, which was a brand new house with double glazing and tiled showers. She loves it, her attention is now on going out and doing things rather than on updating the curtains.
It took a bit of getting used to as you can feel a bit of a second rate citizen, but renting has it's advantages.

One of the major advantages being that it keeps renters off the paint-charts-new-whiteware-bathroom-upgrade-deck-patio-driveway-landscaping-knock out a wall-more painting-new curtains-new sofa-more painting-vases and knickknacks financial treadmill.  
Just lean a couple of pictures against a wall if the owner is anal about picture hooks, call it done, and get on with life.

Yes, I almost never go to Mitre 10 Mega or Bunnings any more. It really is extraordinary how house ownership takes over your life, it fills your thoughts and empties your bank account.

+1....a roof over your head.
And then you need to think about saving for retirement.
Having been freehold for 25 odd years I wouldn't want to borrow a bean.
It's about value and exchange. LVR of 80% + is financial suicide in my opinion.
Rent and be happy.

Appreciate your posts and graphs you have posted on this site.
Intesting looking at Ireland and US differences to NZ.
One other significant difference is a lot of the increase is housing stock value in Ireland and US was due to a massive construction boom. 
How does this fit in with your observations that these countries also had debt rising at same rate as housing stock value?
New debt to build house = a 1:1 ratio of increase in debt to housing stock value even if new house does NOT lead to any increase in value of a housing index/ all other housing stock. 
New debt to buy existing house for increased price = 1:many ratio of increase in debt to housing stock value as all existing property re-rated at an increased value based on small increase in debt.

I know that, for New Zealand, nothing much changes if you look at the "average house" and "average household debt" (so are normalising for both number of houses and number of households) as for within country measures I prefer to work with average house. The changes over time behave in the same way.
I haven't tested the "average house" idea with Ireland or the U.S., but will see if I can find some figures and have a play.