The Reserve Bank's decision to bring forward implementation of the new round of LVR restrictions gives it the edge over the Government in the game of chess that the two parties are playing

By David Hargreaves

Battles of will between a government and one of its own crown agencies are always highly entertaining.

That's because they are always, well, so damn polite.

It's not in either party's interest to go at the other in classic bar room style - "yeah, mate, let's see you outside if you think you're man enough".

No, these conflicts are conducted with raised eyebrows and oblique public comments. A game of chess. A tactical battle of wills.

By bringing forward the start date of round 3 of LVRs the Reserve Bank has positioned one of its knights in direct threat to the Government's King (or Key, if you like). This has neatly counter-acted the Key-led goading attack, which had suggested that the RBNZ might want to "get on with it".

Regrettably, the statement from RBNZ Governor Graeme Wheeler did not end this way, but could easily have closed with "your move now John - you get on with it". 

The strident cries of  'political interference' from the Property Institute were wide of the mark. This was the RBNZ playing politics, yes, but there's nothing new in crown agencies playing politics. You live with lions you hunt with lions.

I think any suggestion that yesterday's move was some sort of rushed, panicky measure, out to appease the Government, is just plain wrong. Pressure the Government yes, appease, no.

The recent speech by RBNZ Deputy Governor Grant Spencer, which gave general indications of what the central bank was considering, was in my view completely misinterpreted in the marketplace.

This was nothing more or less than a central banker being a cautious, prudent, raised eyebrow, central banker. The speech exactly followed the template the RBNZ employed in 2013 when it was seeking to introduce round 1 of LVRs. Back then there was the heavily nuanced, hinting, speech from Spencer, followed not too many weeks after by the nuts and bolts from Wheeler. 

You can argue whether such an approach is too subtle. Presumably in this instance it was too subtle for its wider audience. People who had forgotten what the RBNZ did and how it did it in 2013 appeared to expect Spencer to come out all Stalone-esque, with shirt off, magazines of bullets draped over him and blazing away with a semi-automatic. Well, I've seen Spencer in press conferences going back more years than I care to mention and it ain't really his style.

For what it's worth I reckon the RBNZ was planning to introduce 'LVR3 - the Revisiting' on October 1, so, that the measures were in place before it next has to present a Financial Stability Report in November. At the last FSR in May the RBNZ was left exposed and bulletless, grappling with the recent realisation that 'LVR2 - Let's get Auckland Investors' had fallen on its backside and the housing market had cheerfully thumbed its nose and carried on. The RBNZ wasn't going to go into the next one without ammo.

So, I think the new LVR moves have probably been brought forward by all of a month. And yes, it's political. The Prime Minister having run away and hidden behind that naughty uncooperative central bank is going to need to come out and do something himself now - and the RBNZ will be counting on that.

Because everybody is right. These LVRs are not in themselves a solution. They might at best cause the Auckland juggernaut to pause for six months. Debt to income ratios, presumably, to come in just as quickly as the RBNZ can 'prudently' do it in the New Year, might provide more of a pause. And it's interesting that for the first time in a while the RBNZ has in its latest consultation document re-reminded us of that which we had forgotten. That these LVRs are supposed to be temporary. It might be that the RBNZ thinks it can lift the LVRs onces DTIs are go. But that's conjecture at this point.

The point is that whether its LVRs and DTIs or just DTIs, they are only likely to work as part of a parcel of measures. And the Government needs to do the rest. And I think the Government is gradually realising that. While the 'do nothing' option has been attractive versus the alternative of electorally unpopular moves against housing investment, the further the housing market goes, the higher the possibility of something nasty happening on the credit front. And that would not be a great look for any incumbent Government. 

Our current house price to income ratios and levels of household indebtedness relative to incomes are only looking okay in the current low interest rate environment. But don't doubt it. They are a risk.

So, it is up to the Government to come up with a plan that tackles both the supply and demand side of the housing market equation. If measures to cool the housing market continue to be done in an unbalanced way (basically a central bank on its own with no Government support) then the risk is distortions and an unbalanced outcome. And let's face it if you try to renovate a house with the wrong tools you might bring the whole thing down.

That's the risk and it's a risk that falls on this Government and nowhere else.

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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30 Comments

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Measures by Government along with RBNZ will go a long way in controlling the situation as RBNZ measures by in itself will not help. May be JK and his gang too knows and are only interested in symbolism and do not actually want the market to stabilize otherwise why would they not act now.

Just have to put measures to control Overseas buyer while waiting for the supply (Will take few years) as not acting to curb speculation is the major cause of current housing Bubble (Interest Rate cannot be controlled much because of global factor but deman can be controlled by the government, specially Speculation that is happening in NZ)

If JK does not act now, will be too late and will be hard for them to gain lost ground. This is the best opportunity, even if it does not work (as per them), still they tried and can go to people with head held high.

Better To Try And Fail Than Never To Try At All

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David G, Perfect Headline : YOUR MOVE JOHN KEY.

Unfortunately Remote control to move is not in NZ but somewhere else. NZ is in a sorry state where the elected PM has to be implored to take step to help common New Zealanders - instead of foreign Friends.

What is obvious to everyone is confusion to you :

“The most confused you will ever get is when you try to convince your heart and spirit of something your mind knows is a lie.”
― Shannon L. Alder

No - this was John keys move. Wheelers doing as he's told and folded first. Now John key can keep doing nothing and see pressure taken off house prices to make it less of an issue come next years election.

All I can see key doing from here is bumping up price caps for first home buyers ; doesn't directly piss off investors (rbnz wears that one) and bribes the FHBs closer to election time. Perfect.

Time to for Key to "get some guts", in his own words.
It turns out the "non politician" label he has couldn't be further from the truth, he's the consummate politician, it's all strategy for him, and not at all about integrity or whats good for the country.
Sitting there on 500K a year tax payer money, and never doing a single thing about anything.

Plenty of guts when it comes to getting $$ from the Chinese and sucking up to the US to stay in the 5 Eyes club.

Perfect opportunity for the opposition to return the 'get some guts' favor over a real issue that directly effects all kiwis.

Repeal the Reserve Bank Act and put the control of money back in government hands where it used to be. The way it is now gives the John Keys of this world the power to do nothing and get away with it. When you have unelected people controlling the money, and that is the situation world wide, then there is no solution. If you want a world government then let things continue as they are now. Then it will be god help us, because no body else will.

he is the head guy if its too risky and he thinks so he can put his own measures in place why does he need the RB to tell him what to do.
sounds like he is sprinting at the cliff knows its there but does not want to lose the race to the Westpac,bnz or asb guy. and wants the RBNZ to put up a safety rope so they don't all fall over

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JK is in a strange place.
First of all his position is there is no crisis even though he is on record in 2007 as saying there was.
Secondly if he affects housing to the extent immigration and construction is reduced then there goes his artificial GDP growth.
Thirdly if he causes a drop in house prices the smug grey rinse brigade who have no interest in FHB's plight won't be too happy and they are part of his base. Election day is a big day out for this group and they vote in the high %'s wheras those more directly affected by house prices are more reluctant to make the effort. Hard to believe.
I believe he will continue this strange TwilightZone mode of his where he rushes around making all sorts of proclamations but at "the end of the day" does nothing

housing affordability really only affects mainly a few people on this website...most NZers are just getting on with buying a property to house themselves or a family...and understand now that a free standing home in an inner city suburb is not going to happen (like any big city in the world) but with a bit of constitution and sprinkling of smarts are probably buying a townhouse in the West or South Auckland around the $500-600k mark

Yeah it always is all good with everyone's head in the sand before things go pear shaped, every other bubble in history was like that too.

Is not a bubble. We are a small island nation and there is not much space. Look at America, the people that got burned were the ones with cookie cutter houses in spacious suburbs. Those in denser cities like Chicago were fine, just plateaued. NZ is different. There is only one major city and that is full. The other towns are not that expensive. Hence AKL remains relatively expensive if you are looking to buy a free standing home, but tell me who in London as a FHB buys a free standing home? Prince William and Kate did with the help of their grandmother but otherwise I cant think of anyone else...A detached home is not a right in this world, an apartment is a good first step for FAB's...First Apartment Buyers.

Garbage. If the bubble burst it will affect the vast majority of kiwis.

Its not a bubble if this carries on for another 5 years. John Key is not going to let it crash on his watch and we are looking at a National government with JK at the helm for another term then I expect him to pull the pin. If it all goes pear shaped after this there will be no one held accountable as politicians ALWAYS blame the previous government anyway. My prediction, expect more of the same for years to come. New Zealand is a safe haven with plenty of water around it while the rest of the world turns to custard, expect ALOT more people trying to get in here.

God I hope you are wrong about that "another term" remark.

The story that there is no opposition is an urban legend. Take the Emperor with no Clothes out of the equation and you are left with the ilk of Collins, Brownlee, Smith et al - yoiks.

No dead serious there is no opposition. Sure when enough people think it cannot get any worse they will vote in a mish mash opposition and THIS is when the property market will crash. Like I said they will then blame it on National.

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As I'm sure many here know, this crisis could easily have been averted 5-6 years if not a lot earlier with the right, very do-able policy settings.
It has been in Key's political interest to see the bubble expand. If it explodes he will always be remembered as the PM who led NZ into an economic catastrophe. And he'll need to look hard in the mirror.
He should be worried.

An observation I've made is how supposedly clever/intelligent people, with powerful brains (pre-frontal cortex control over limbic system), can convince themselves that their behavior is meaningful and for the greater good - and not take a backward step and say 'I've got this wrong', or in the case of NZ voting society 'we've got this wrong'.

How else could JK and the believers keeping smiling in all those selfies he takes with 'the supporters' when people are sleeping in cars because of his/Nationals poor policy making? While at the same time keeping his 'victim story' of growing up in a state-house because he thinks this makes him more 'relatable' to the poor - but perhaps not considering that having a statehouse upbringing these days would seem like a life of privilege for a lot of kids, compared to the sleep-out, garage or van they find themselves growing up in.

Clinging to this denial is only going to get tougher by the day for JK and National....I'm starting to feel sorry for the him and his team of shallow self-promoting 'leaders'.

A self-fulfilling prophecy is a prediction that directly or indirectly causes itself to become true, by the very terms of the prophecy itself, due to positive feedback between belief and behavior.

I get the feeling that when JK looks in the mirror he sees himself as a prophet of god here to deliver NZ to the heaven's of Switzerland of the South Pacific, but in reality when many look at him, they just see satan.

Personally I don't hate or intensely hate Key. I just mildly dislike him now, when I quite liked him in his first term.
I don't actually think he has nasty agendas, I just think he's bogged down in centre-right dogma and conservatism, which he can't break out of.

More of an infinite loop, perhaps.
Any Govt has voters and house flippers to consider.
That's the reality of politics.

David G, Perfect Headline : YOUR MOVE JOHN KEY

Fantastic move by Wheeler as it really does put the ball in the Governments court and they can only blame themselves if they fail to act. It was a crisis in 2007 according to John Key so now that prices have doubled it surely still must be a crisis ?

Love the graph above it doesn't paint a pretty picture.

wonder if the Herald's choice of photo with a young Asian man walking past a Real Estate window is a coincidence or intentional???

http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=1167...

If the photo was taken in the CBD of AKl then it is is coincidence. I hear the last original kiwi living / working there is currently packing his bags.

"Is not a bubble. We are a small island nation and there is not much space."

Isn't 60-70% of Auckland land Rural ?

It is a bubble look at the chart above. Problem with bubbles is people get so caught up in it and they fail to see the warning signs. ANZ chief has called it over-cooked. John Key called it a crisis in 2007 when prices were half today's level. It is a bubble.

The problem is foreign buyers and investors buying a majority of the houses when supply is short. Take out the demand and the price will eventually drop.

"We are a small island nation" - perspective - Java is about the same size as the North Island and there are around 120 million bodies running around there. Possibly room for a few more given urban NZ is only 2% of the land area. Plenty of room for supply solutions.

Auckland region's rural area is nearly 400,000 hectares. Huge resource for housing. Could get a huge amount of housing with just 70,000-800,000 hectares without touching the productive stuff.
Most of NZ is a farm, I don't see why we need to be so precious about a relatively small area of rural land (most of which is not productive) near our one kind of biggish city Auckland.

We are catching up, we had a good run till 2012 and after that the new normal and fair price is what it is now. To bring prices down you need to get rid of height restrictions and villa historical zones and build like Surfers and Vancouver. Even then prices won't go down but people will be able to buy 600k apartments in Auckland for their families. Walmart's Global turnover is 3 times higher than NZ's GDP, we have been asleep for a long time.

Key will wait for polling results before doing anything.