By David Hargreaves
The Reserve Bank is probably wishing about now that it had included debt-to-income ratios in the macro-prudential toolkit it got Finance Minister Bill English to sign off on in 2013.
Now a bit over three years down the track we see a central bank that appears to have decided that DTIs are really THE weapon of choice for the country’s galloping house market, but the Government and its Finance Minister are now getting a little shy on it – first behind the scenes and now more overtly.
I must confess, I thought it was a given that the Government would rubber stamp the RBNZ’s request to slip DTIs into the macro-pru toolbox. But I guess in thinking that, I simply wasn’t thinking closely enough about next year’s election. It appears the Government is. Oh yes.
Both the Government and the Opposition parties are already very much on an election footing and we are not into election year yet. It’s going to be a long 12 months – always supposing we don’t get an early visit to the ballot boxes. And I suppose that can’t be ruled out, though I’m not sure any valid reasons exist for calling an early vote at the moment.
Be that as it may, my earlier assumption that the Government would quietly acquiesce to the introduction of DTIs was based on its previous unwillingness to get hands dirty in terms of the demand side of the housing market equation.
Yes, the Government has been happy enough to let the evil Reserve Bank be the fun spoiler that wilfully locks aspiring young New Zealand couples out of first homes.
However, if you really start to boil it down, the hands-off approach has started to let the Government down quite badly.
It’s true the Government has been able to throw its hands in the air and say it can’t stop the RBNZ doing what it will do. But unfortunately for the Government it hasn’t been able to extricate itself – as it might have hope and wished – from the reactions of people to the RBNZ moves.
The RBNZ’s macro-prudential measures since 2013, expressed through three phases of loan-to-value ratio lending restrictions, have been a bit like an out-of-control Guy Fawkes Night party. The RBNZ’s the guest who comes along, lights the blue touch paper, and sets off the big-banger fireworks. The Government’s the owner of the property that has to go and explain what happened to the angry neighbours the following day.
Now, the Government’s been prepared to do that up till now. But election year is different. The Government will not want any uncontrolled firework combustion resulting in consequences it can’t keep a handle on.
The Government intends to be in charge of the lit matches next year.
If it were to allow the RBNZ to slip DTIs into the macro-pru kit early next year – as the RBNZ would appear to want – it then couldn’t control when the RBNZ might use them. And the RBNZ might well use them at a moment that doesn’t entirely suit the Government and its election campaign.
So, what is likely to happen?
Well, it is beginning to look like delay, delay, delay from the Government, isn’t it?
Certainly there is a valid argument for saying that we should wait and see what happens with LVR3, the 40% deposit restriction for housing investors. Early signs are it is having an effect.
Different this time?
Prominent Auckland broker John Bolton has already said he thinks the RBNZ has with the new move applied a sledgehammer to the housing market. Economists as the country’s biggest bank ANZ said this week that the slowdown currently being seen looked to be “different” this time; that is, likely to be more enduring.
I remain unconvinced. The general body language the RBNZ gave off when it unwrapped LVR3 in July was that it was a ‘holding’ measure to give the housing market some cause to pause while the DTIs were readied for introduction. I didn’t get the impression the RBNZ itself was all that confident the move would have a lasting impact.
There is a risk here that the Government delays and delays the DTI introduction and then in the meantime the impact of this round of LVRS starts to wear off and away goes the housing market again. Then it becomes a real scramble to catch up.
The RBNZ was left palpably scrambling earlier this year when the Auckland-centric second phase of LVRs introduced toward the end of last year essentially failed. The central bank would not want to be left looking at a roaring house market and no ammunition in its weaponry again next year.
However, it might be.
Controlling the agenda
From the Government’s perspective, it will want to control the agenda in election year. Therefore by holding the RBNZ at arm’s length it frees itself from the possibility of uncontrolled events – events that could then be used by the Opposition to set that agenda.
So, it will be no surprises as far as the Government’s concerned. And it will look to control housing issues with its own initiatives.
We can already infer that the supply, supply, supply side of the equation will again be hammered, with the Government committing in a more material way to being directly involved in building more houses. That’s already been clearly signposted, albeit with details very vague.
And I would still suspect that the Government probably has a thing or two up its sleeve ready if needed for unwrapping in next year’s Budget to tackle the demand side. Vancouver-style taxes on foreign investors would be a popular move, for example.
Whistling in the wind
What it all points toward is the RBNZ left whistling in the wind, next year at least, when it comes to getting DTIs installed in the macro-pru kit.
If that’s what happens, then I think it could be pretty unfortunate, to say the least. DTIs seem like a good idea to me. They SHOULD be in the macro-prudential toolkit as an option. It is a clear oversight that they are not. And they should be at least available.
Personally I would prefer to see LVR restrictions lifted and DTIs applied instead.
I think the Government’s taking a bit of a risk all-round here. All I can say is it needs to be confident that it has a plan for the housing market. Because if it denies the RBNZ the chance of using the tool the RBNZ thinks is best to apply against the housing market, and then the housing market takes off again, well, that just increases our risk as a country. And for what? Political expediency.
It doesn’t sound like a great plan to me.
Maybe I’m wrong. Maybe the Government will sign off on DTIs early next year. But somehow it doesn’t look that way at the moment. The election’s getting in the way.