The Reserve Bank's decision not to cut interest rates looked like a central bank trying to buy more time while decisions are made on the housing market, David Hargreaves believes

The Reserve Bank's decision not to cut interest rates looked like a central bank trying to buy more time while decisions are made on the housing market, David Hargreaves believes

By David Hargreaves

The Reserve Bank would be unlikely to ever admit it, but it's likely that Auckland's troublesome housing market got in the way of another interest rate cut.

I say that the RBNZ might not want to admit it; well, the reason is that since rising house prices are not yet posing a significant inflation problem, the incendiary Auckland market falls outside the current gambit of monetary policy.

At this point the houses are a financial stability problem, financial stability being the other branch of the RBNZ's responsibilities. But as is being talked of a lot at the moment, the monetary policy and financial stability roles are not sitting at all well with each other and it is a conflict that needs sorting out.

Having predicted that the RBNZ WOULD yesterday cut the Official Cash Rate below the current record low of 2.25%, I'll take my medicine on this one.

To me, yesterday's statement looked like a central bank trying to buy itself a little time while it worked through some desperately difficult decisions.

Remember, the RBNZ has its next Financial Stability Report coming out on May 11. Expect plenty on houses in this.

Should we now, however, be expecting anything definitive from the RBNZ in terms of new measures against the market and/or the banks?

Personally I think the non-cut yesterday suggests that there will be sabre rattling but not as yet substantive proposals.

It may well be that the the central bank is waiting for the Government to sort out exactly what it wants to do in and around the Budget on May 26.

Last year there was the twin attack on the housing market with the RBNZ's May FSR announcing the new measures against Auckland investors that ultimately took effect in November, while the Government unleashed tax proposals that were introduced in October.

Has the government decided definitively what it wants to do? Perhaps not. There seems to be a lot of thinking out loud going on at the moment - probably in an attempt to see how public opinion sits. All this might mean the RBNZ's playing a bit of a waiting game, which has little to do with inflation and a lot to do with the houses.

I'll go back to what I said last week, which was that if the RBNZ was confident it had got its lines sorted out for the FSR announcement, I didn't think it would have any problem cutting interest rates this week.

I suggested that there would be a cut this week and the foreshadowing of new housing-aimed financial measures less than two weeks later.

I also said anything less decisive than that would suggest a central bank that's really struggling to get to grips at the moment with the twin and conflicting monetary and financial stability roles. And so it seems to be.

I still think the RBNZ is going to be forced to cut rates further and that will presumably happen in June. The chances have firmed that the Reserve Bank of Australia will be forced to cut rates across the ditch from their current 2% on May 3, so there will be a half percentage point gap between our rates and their rates again.

Globally, I just think we will be forced into it. The strength of the New Zealand dollar is likely to keep the pressure on.

Of course the further down the interest rates go then the more the heat is likely to emit from the housing market.

So, probably between them, the Government and the RBNZ really do have to come up with something this time around.

They had a go last year and they failed. But the Government was definitely very half-hearted about it. Perhaps only now is it starting to get the true magnitude of the situation and the need for action. It's at least a start that there is that recognition.

The worry would have to be that whatever comes out in the Budget is likely to be a half-way measure that won't fix the problem and could make it worse.

For the RBNZ the interesting times continue.

I don't buy the market sentiment that says the central bank was less 'dovish' in this OCR. Remember this is an RBNZ that has previously just about said point blank that it wouldn't drop rates again - and then has.

Daub a big red-inked note in the diary that says RATE CUT for June 9.

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I don't know what to believe, They are going to remove the Kiwisaver Homestart income caps....this is just going to add more fuel to the fire.

Totally agree. This seems like just more ambulance at bottom of cliff policy changes and stinks of desperation

I predicted this would happen. Next thing is developers getting grants to sell to FTB at a discount as they will say "its not worth us building unless we can sell for X"

The government have had over a year to think about the next steps for cooling the property market so I don't know what they are waiting for. The Land tax seems a fair starting point. I'd be interested to know what rate people think they should introduce on overseas owned properties?

Thinking and understanding are not strong points of this Government. The Ministers don't even respond to any emails these days. I think they were hoping to ride it out until the next election without rocking the boat.

14
up

Next election. Wipe them out. All of them.

How bout something totally old fashioned - maybe the govt could build more houses itself???
This govt won't though - it's not in their DNA.
But we need some scale in the response.
Govt housing doesn't have to be housing for those at the bottom of the heap - it could also be market rate rental housing for low-middle income earners.

Maybe my latent socialist inclinations are coming through, but bugger it. Increase income tax to 35% on incomes above say 100K and start building some housing at scale!

Close the tax loop holes first, then I will be happy to pay tax at an increased level.

Out of curiosity, what do you see as the tax loopholes?

"The only people in New Zealand who benefit from the foreign trusts loopholes are the tax consultants and trustee companies collecting fees from providing trustee services, Dr Russell says."
So why is the PM so desperate to protect their status?

Yep, "don't tax me, don't tax you, tax the man behind the tree"

Why is the answer always more taxes? Don't you pay enough already? I know I do. More taxes are usually suggested by people who never have to pay them. I'm no billionaire hiding money in Panama and pay more than my fair share. I think you need to look at other places to raise revenue.

It just astounds me that they would choose not to curb demand from wealthy property investors to give FHBs a chance and that most Kiwis wouldn't at least understand their reasoning. But I know that's naive of me as most people vote with their pockets.

I have had a few conversations along these lines over the last few days. There seems this idea that landlords and property investors are in control of the electorate, and that there is not the political will to challenge their ability to accumulate more tax free wealth. I think this is naive. FHBs, home owners ex investors, and even investors concerned about FHBs and financial stability in general are a large voting block, and I would suggest require something bold in the run up to the next election. There looks to be only one election issue.

All rational National(or ex-National) voters I speak to accept that there needs to be a rebalancing of the property market even if it means those with second homes have tax their tax advantages taken away. The land tax for froreign investors against a stamp duty is sensible-although many foreign investors are creative in the way they get around regulations.A land tax for second home owners would probably too bigger hit to come in immediately but could be something that is used further down the line.We have to help the younger generation and not load them up with more debt.

Try to fit 14 eggs into a dozen carton... Doesn't work does it ? You can invent new laws and create new taxes... it still won't work. The issue is SUPPY and DEMAND, no amount of new laws and taxes will work until supply and demand are better balanced.

But laws and taxes directly affect demand.

Policies which are very favorable to property investing as opposed to, say, share investing, affect demand. Taxes making it more costly for nonresidents will affect demand.

laws and taxes may effect the ratios of FHB, owner occupiers, I=mum an dad investors, commercial property portfolios - but it does little to tackle the fundamental issue of the number of people against het number of properties !

Simply put people need a place to live regardless if they own or rent - if every house in the country reduced in value to 50,000 - there would still be an issue of not enough houses to meet the demand of people wanting to have their own homes, population growth and immigration.

currently many people who want their own home are in shared accommodation, living with family / parents - so when a new home is built large number of people want it and the price reflects the highest that just one of those people is prepared to pay

If its to be tackled - its More supply - and reducing demand which will only happen through tighter immigration controls - starting by limiting this to people bringing skills we really need and currently cant train enough Kiwi's to do - and building more houses - now that's where tax and law changes could make this easier by reducing build costs, council planning fees

I understand what you're saying, but the fact is that you can't build your way out of the problem as long as all the perverse incentives - no obstacles to foreign ownership, preferential treatment of investment properties - get fixed. The greyhound never catches the rabbit.

Local demand for houses can change. If people want to live in Auckland because of jobs, you can incentivise business growth in the regions. Where there is more affordable housing and jobs to support it, people will follow.

flebus: lets say for arguments sake there are no more landlords tomorrow; you still have exactly the same number of people living in auckland and the same number of houses = same problem, trying to fit 14 eggs (more like 16) into a carton of a dozen.

Perfectly explained kpnuts

The supply can't come on fast enough so you have to tackle demand. That is immigration quotas and price out overseas buyers. Simple really.

Totally agree. A supply side response is necessary, but not nearly sufficient. There are a range of things to on the supply side, free up land, reduce costs on material, get rid of GST on new builds... But totally ineffective in terms of the electoral cycle. Migration, taxation, macro prudential restrictions. The demand side will dominate.

A loose parallel but think about public transport, traffic and roads. You can build more roads, but they will be filled with cars as long as cars and petrol remains cheap and people are incentivised to keep acquiring cars - so the traffic builds and people can't get to where they need to go. You need to give people viable alternatives and disincentivise the purchase of additional vehicles. A tenuous link and I realise that we need to build more houses whatever - but you know what I am saying.......Its about systemic success or failure. You need a comprehensive series of measures addressing both sides of the equation.

We are doomed as a country for now and in the future. If land costs this much now then we are all going to have to live in apartment blocks. This is unacceptable and I pity anyone who doesn't own a house as you are doomed forever. Is this a country we want to be living in? The only thing that can fix this is 20% interest rates or another World War which will get the population down, unfortunately I dont foresee any of that, but then again neither did anyone foresee the credit crunch, 80s stockmarket crash, WW1, WW2, Dotcom bubble...

We are doomed as a country for now and in the future. If land costs this much now then we are all going to have to live in apartment blocks. This is unacceptable and I pity anyone who doesn't own a house as you are doomed forever. Is this a country we want to be living in? The only thing that can fix this is 20% interest rates or another World War which will get the population down, unfortunately I dont foresee any of that, but then again neither did anyone foresee the credit crunch, 80s stockmarket crash, WW1, WW2, Dotcom bubble...

Foreseeing...
You may know more than you think

http://www.telegraph.co.uk/business/2016/04/27/the-european-union-always...

Yet the all-pervading view is that the Western liberal order is under triple assault, and the EU must be propped, much as Britain and France propped up the tottering Ottoman Empire in the 19th - and wisely so given that its slow collapse led directly to the First World War.

Today's combined threats comes from Jihadi terror and a string of failed states across the Maghreb and the Levant; from a highly-militarized pariah regime in Moscow that will soon run out of money but has a window of opportunity before Europe rearms; and from an extremely dangerous crisis in the South China Sea that is escalating by the day as Beijing tests the US alliance structure.

The dangers from Russia and China are of course interlinked. It is likely - pessimists say certain - that Vladimir Putin would seize on a serious blow-up on Pacific rim to try his luck in Europe. In the eyes of Washington, Ottawa, Canberra, and those capitals around the world that broadly view Pax Americana as a plus, this is not the time for Britain to lob a stick of dynamite into Europe's rickety edifice.

We are doomed as a country for now and in the future. If land costs this much now then we are all going to have to live in apartment blocks. This is unacceptable and I pity anyone who doesn't own a house as you are doomed forever. Is this a country we want to be living in? The only thing that can fix this is 20% interest rates or another World War which will get the population down, unfortunately I dont foresee any of that, but then again neither did anyone foresee the credit crunch, 80s stockmarket crash, WW1, WW2, Dotcom bubble...

I agree Mr Pero, it's not looking good for us as a country I suppose it's what happens when you let the rats run the chicken coop and I think it needs a change at the ballot box to fix it.
At the end of the day with debt, I always think it's the paying back that counts and thats starting to look problematic, bubbles never last for that long and this one has well and truely run it's course.

The poisoned chalice

When you have a problem it is preferable you attend to it as soon as possible. If it's allowed to fester the eventual solution tends to be extreme, almost amounting to overkill compared to what could have been done at an early onset. Like gangrene. If you have gangrene of the big toe it needs too be amputated. If you leave it and put up with it you end up losing the foot. Leave it longer you lose a leg

Like the Muldoon years, problems got worse and Mulddon was incapable of self-reflection

Muldoon was turfed out, Lange and Douglas took over, and the surgery began

The populace didn't like the surgery and Lange and Labour in turn got turfed out PDQ

It seems National know there is a problem but are incapable of taking the remedial steps necessary, preferring to pass the poisoned chalice to the next Labour administration to do the dirty work, thus ensuring a rapid return to power, with all the surgical work done by labour

Http://www.stuff.co.nz/business/opinion-analysis/79459082/shamubeel-eaqub-housi...
This piece sounds like it was indirectly organised from the PMs office.
The only solution is Supply apparently. This is the line that is now being rolled out.

Solution is tax on gross rent and no tax deduction for any expenses..for residentail properties . This will reduce investor appitite for properties. That means non resident and resident is taxed on any rental proprty.. in addition to land tax for non residents. Its simple to cool the market make the investment less attractive. ..also make a rule that MPs cant own rental proprties..so then they work a lot harder them owning 4-5 properties doent help the cause.