David Hargreaves suggests a subdued housing market in the run-up to the election may ultimately work against the Reserve Bank

David Hargreaves suggests a subdued housing market in the run-up to the election may ultimately work against the Reserve Bank

By David Hargreaves

It may seem strange now to say it - but perhaps one day quite soon the Reserve Bank will regret the subdued state of the housing market leading into the 2017 election.

That suggestion needs some explaining, which I will attempt to do.

The very first thing I would note is that the above suggestion is rich in latent irony, given that the RBNZ was hell bent in slowing down conditions, particularly in Auckland, due to mounting financial stability concerns.

Now, however, the slower conditions are with us.

The RBNZ will be probably pretty happy to claim credit that its - what seemed at the time desperate - clamping of a 40% deposit rule on to housing investors has preceded the slow down.

But of course, that's just been one variable. Two others of a difficult-to-quantify nature have been the move to 'rationing' of credit by the big banks, and the turning off of the tap from foreign investors. I suspect these factors have probably been more significant.

Either way, this should be all good for the RBNZ. Its fears over the rising financial stability risks, particularly arising out of Auckland's highly leverage market, will have been somewhat soothed.

Inevitably though - and this is where the strangeness comes in - the easing of house price pressure means the previous urgency for particularly the Government (whoever that may be after September 23) to embrace changes around banking rules and home lending practices will be dulled. If the housing market ain't broken, don't fix it.

Well, this might not be so good.

Next year is potentially a big one for the RBNZ. Deputy Governor Grant Spencer will do the Governor job for six months through from the election and into next year - and then it will be up to a new, yet to be appointed Governor.

There will have to be a new Policy Targets Agreement. The RBNZ will be reviewing the full macro-prudential framework in 2018. The issue of debt-to-income ratios will be bubbling along somewhere.

This Government has already signalled that its keen to have a look at some operational aspects of the RBNZ. Of course, a new Government could take us in different directions with such a review.

Points of difference

One obvious potential point of difference is the likelihood that under a new Government the PTA may be broadened to include other targets than inflation.

So, it is looking like quite a pivotal year for the RBNZ. A time of change and a time for changes to be made.

Had we gone into next year (and it is for sure now that we WON'T) with a still sharply rising house market, the RBNZ would have been in a strong position to argue - particularly for maybe even bolstered macro-prudential tools.

Personally I think a DTI ratio tool absolutely should be in that macro-pru toolkit - but without the urgent provocation of rising house prices, it's unlikely. The RBNZ had its chance on this one in 2013 when the macro-pru regime was being agreed with then Finance Minister Bill English. In what's looking a bigger and bigger oversight by the day, it didn't take the chance then.

Going against the RBNZ

But the DTI ratio tool, or lack thereof, might prove to be just one example of how the slower housing market will go against the RBNZ next year.

A new Governor and perhaps a new Government would ideally be a time to lay out a new framework for the RBNZ - and indeed for the banks - to take us forward.

Personally I would like to see constructive change to the macro-prudential regime, particularly to include DTIs. And I would like to see the RBNZ left with options, perhaps particularly ones that can be deployed directly against banks in respect of lending - such as capital buffers.

What I think we may well see happen next year in the face of a subdued housing market is an RBNZ that is held back. Clearly there will be no DTIs. Who knows there may even now be push back against some of the existing tools in the macro-pru toolkit.

The important thing to bear in mind is that while the house market is calm now, at least some of the things that have caused the quieter house market may be quite easily reversed.

The banks might loosen up

Depending on what happens with funding requirements - and particularly deposit flows - the banks might loosen up on the 'rationing'. The flow of offshore money could easily resume.

The fact is the RBNZ was looking dangerously short of ammo to fire against the housing market last year. The LVR weapon looks now close to the limit of its effectiveness.

All available options need to be on the table.

The fear is that, out of sight out of mind. If the house prices are not going up today, we'll put it all off till tomorrow.

I think we are about to pass up a good chance for getting the RBNZ well set up for the future in terms of how it handles financial stability issues. And that's something which could come back to bite, both for banks and for home buyers.

...All because house prices have levelled off. Irony indeed.

*This article first appeared in our email for paying subscribers early on Thursday morning. See here for more details and how to subscribe.

We welcome your comments below. If you are not already registered, please register to comment.

Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.


David : You say that the Reverse Bank was dangerously short of ammo to fire against the housing market last year ...

... so , what is the OCR , if not the ultimate ballistic missile to launch against the speculative bubble of our property market ... yet Graeme Wheeler chose to keep it locked away ... far far away ...

I , for one , am absolutely gob-smacked that the RB jaw-boned about our horrendously high house prices , at the same time as they held the OCR down at historically low levels ...

... or , am I missing something here ?

The RBNZ's Policy Target Agreement with the Government requires a Consumers Price Index (CPI) of between 1 and 3 percent on average over the medium term, with a focus on keeping future average inflation near the 2 percent target midpoint.

The RBNZ hasn’t met the 2% target since 2010 and only recently (March 2017) squeaked back into the lowest acceptable 1% range.

I am Gob smacked that the OCR stayed so high for several years while RBNZ failed to do its job. In my opinion senior staff at the RBNZ should all be replaced.

... ah yes ... silly Gummy ... I keep picturing in my mind's eye the real inflation rate ... you know , the one that includes the monstrous rise in rentals and house prices each year ...

Not the official one ... the CPI ... which makes it all look benign , and safely under control ..

.. trust us folks ... it's all under control of us experts ... says the Captain of the Titanic moments before he gets a smidgeon more ice in his G & T than he'd bargained for ...

Monstrous rises in rents? Oh and you live in Chch now? havent property prices been dropping there?\\

how is the rest of the country doing? house prices on say the West cost?

so what mystical inflation exactly?

Then lets consider what you claim what action do you take? rise interest rates to say 10%? 15% do you really want to kill what manufacturing we have and then cause a recession if not a depression?

nooooo thanks.

.. I'd pitch the OCR at a historical long term average of 5 % ...

That'd slow down the local speculators ...

... and then , ask the government to stop overseas investors from laundering their money through NZ real estate ...

Because I reckon that houses in NZ ought to be for citizens to invest in , and that they ought to be realistically affordable ...

That's the past and frankly if speculators are making 10%, 20% per annum 5% interest is not a biggee.

Meanwhile the tradables sector that is struggling to stay in the game at a fraction of that "normal" rate start to give up and shed jobs.

Now I'll agree we should stop foreign ownership especially land banking.

No a house is a home and not an investment, a business, shares or bonds are an investment.

So we need to stop the darklord practise that is a sick and evil disease that has corrupted many minds in this country?

CPI stands for a Consumer Price Index. As in the price of things that are consumed (at a particular moment in time). Real estate prices are not the price of something consumed because they contain the value of current housing consumption but also the capitalized value of future housing consumption. As such, including house prices would make the CPI a mixture of consumption at different times, and therefore unsuitable for comparing the price of consumption bundles at distinct times. Instead, they use a purer measure of the price of housing consumption: rents.

Rents reflect the price of consuming a flow of real estate services at a moment in time. Of course, many homes are owned by the occupants and not rented. Therefore, the calculators of national accounts generate something called "owner occupied rents", which is an attempt to calculate what the rents would be on homes that are occupied by their owners. This measure has problems, but for many purposes is quite adequate (Crone, Nakamura, Voith (2004)).

Accordingly rents are included in the CPI calculation as well as the price of new builds. Similarly property maintence costs are also included (see http://www.stats.govt.nz/browse_for_stats/economic_indicators/CPI_inflat...).

Well yes. The "housing costs" component of the CPI is watered down and weighted to the point that it is relatively benign quantitatively. The CPI has little to so with the day-to-day reality of individuals or households.

Unless the CPI reflects house prices (which is the biggest cost to most people) it is completely irrelevant

yep as always you miss most things.

Hey ... any idea where your old buddy Powerdownkiwi ( PDK ) has got to ? ... miss him around here , too ...

Dunno maybe he had enough of dealing with idiots, I must admit when I see you still spouting the same old, same old I can understand him.

.. oh gosh ... I didn't know you cared ... I've come over all gooey now ... gooey Gummy Bear ... Bro hugs to you too , mon ami !

It warms the cockles of my heart to see the old team back in action.

....gone sailing - NZ Lifestyle Block 1/4/17. Maybe he took wolly?

Yep, Gone Sailing, on the high seas, last seen in Tonga

Gummy Bear - what I've been trying to get my head around in terms of monetary policy, is why we drop interest rates to get ourselves out of recession.....I mean given the current mind set of the average human, if debt is available to them they'll gouge themselves silly on it - and often not on value added things. So to me, the only way it works is by having DTI ratios coupled to OCR drops, so that your average debt junkie can't do themselves and the balance of the economy too much damage. Are we any better off now than we were before the GFC?

Exactly my thinking too ...

... sadly , friend " steven " is a debt denier !

But yes , we are no better off than moments before when the GFC cracked the thin veneer of our monetary cistern wide open !

Actually I've spent 9 years paying off debt. almost done it, hoping the stupids keep the ponzi scheme going 1 more year. Not that I think I'll be immune to the coming carnage.

Yes we could already be in a second Long Depression. Though the last 9 years dont stack up well either its a bit of a better outcome.

This is a truth, if debt is available - people will max it out. Cycles happened because banks tried to force people to deleverage, against their will I might add. What if banks just kept everyone fully leveraged? There would be no deflation, debt levels stay high, interest rates stay low, and price stability is achieved. Instead of trying to restrain animals spirits, embrace them as a market force and the market works.
You have to forget the theory that there is some kind of ideal debt level, and let the market decide for itself

The government and RBNZ are usually to late and can't do that much to stop a falling market, 1967, 75, 87, 98, 07 if my memory is correct were all corrections and if the government or RBNZ could have done much I'm sure they would have but most times the market went down or flat for at least 4 years later, but the RBNZ in most cases did help things from getting worse each time by lowering interest rates at the start of the correction, but woo they didn't take the rates up in the boom, naughty, taking prices ever higher, now what, offer to drop LVR, s , is that it, investors , a lot under water, in a falling market, good luck, did you ever wonder why from 2008 to 2014 the market was flat, investors uninterested, a market needs a good kick up the butt to get moving, overseas investors, Auckland mainly, then our own, overseas investors are gone and housing is threw the roof, and aucklanders are finding it harder to sell and move out, I'd laugh if it wasn't so sad

Why SHOULD they do anything to stop a falling market. Nothing is done about asset prices rising, the same should go for asset prices falling.

Something is/was done about asset prices rising by the Reserve Bank; LVRs, Captial Ratios, even a subsequently reversed increase of the OCR.

But of course there are other factors working against them.

I agree with the author. The property market is just resting and building pressure until after the election. We still have record high immigration coming in. Foreign investment has not been controlled other than they have lost confidence in further huge capital gains. Interest rates have only gone up a little bit with a 5 yr fixed still being less than 6 % which implies the banks don't see any big increases. Auckland property prices are re positioning themselves but this will just be an adjustment, not a collapse. After the election and arrival of warm weather I think we will see more capital gains. Full steam ahead for at least 1 or 2 years.

NH.. I pretty much agree with you, thou I'm not so sure about the "full steam ahead" after the election.

World is moving into uncharted territory with Central Banks starting to taper...


I attended a Barfoots auction yesterday and was very surprised. Three quarters of the buyers and agents were Chinese. Out of 12 houses on offer only 3 sold and they were to Chinese. Only Chinese were bidding. I asked an agent why no New Zealanders were bidding. He told me finance is very tight now for NZers, but Chinese have access to plenty of money from China. When a house is passed in, I was told, they then offer the seller a very low ball price hoping that they will panic and sell.
It is a very sad indictment on our society when mostly foreigners can buy houses but NZers are shut out of our own market.
The Government should have put the brakes on foreigners etc buying houses 6 years ago. It is too late now as many NZers have mortgaged themselves up to the hilt to get a house. Sadly, many of these people will have negative equity in their houses if prices drop by 10% or so.
Even if some people sold and rented, they would still be faced with a bill from the bank if prices dropped significantly.

It's heartbreaking really.

Probably the only chance of a government ever allowing the Reserve Bank to have DTIs in their toolkit is after the market has reached a point where introducing DTIs won't crash the market but instead would just stop it bubbling.

So, I disagree with the author. There's no way a government would have allowed DTIs past the goalie in a booming market IMO.

Would a politically acceptable compromise be something like DTIs of a high level (like 6) with an effective date coming in at say 5 or 10 years in the future. Wouldn't do much for the immediate short term situation (apart from limiting further potential rises to a predicted future DTI level) but would actually get them into law?

But whats the point if the horse has already bolted? The boom that you talk about is fuelled by debt and speculation.

Surely it would make more sense to couple DTI to OCR drops? Stop people getting themselves too exposed?

The point is that they'll at least be in place for next time. E.g. in approximately 7 years time when the start of the next boom begins of classic boom/bust cycle.

The horse has already bolted for this cycle.

Most people miss the point of why we need a capital gains tax.

Almost everyone thinks it is to keep property prices down and / or to collect more tax.
The main reason that a capital gains tax is to make the tax system fairer.

At the moment someone with, say, 12 houses sells one and makes $300,000 capital gain pays no tax.
Someone working in a factory on PAYE has to pay 33% on his wage and then pay rent to the above person.
It is almost obscene that the wealthy person pays no tax while the factory worker has to pay 33%.

the guy in the factory gets to pay GST too.