With no current Government and no permanent Reserve Bank Governor, there's potential for important decisions regarding housing to be left late

By David Hargreaves

Timing is everything.

And some of the timing around decisions ultimately affecting the housing market is not looking great at the moment.

It is anybody's guess when we will get a government sworn in and up and running.

What's rather more predictable is that Christmas and the end of the year are both approaching with great speed.

Even if the shape of the next government is settled this week, it's very questionable how much can now be achieved before Parliament goes into recess in December.

Given the delays that have occurred since the September 23 election, would our MPs consider staying on in Parliament for longer than usual this year to get the new government up and running?

Well, you can argue that maybe they should. But I wouldn't bet on it.

Priorities

The interesting thing then will be priorities and what things logistically the new government will attempt to tick off - and what is physically possible before the end of the year.

The portents in all this are maybe not good for the housing market.

At the moment obviously uncertainty rules. Anecdotally the banks' lending policies are getting tighter and tighter - possibly in some part due to the uncertainty.

The latest iteration of the Reserve Bank's LVR restrictions - the 40% deposit rule for investors - is still seemingly having an impact too.

We are just at the point when the question is worth seriously asking about whether the RBNZ should now be considering backing off with the LVRs.

LVRs a blunt instrument

I would imagine the RBNZ itself is still pretty happy with how things are at the moment. But LVRs are a somewhat blunt instrument - and there would be a risk in the restrictions going on for too long in their current form.

However, the RBNZ's probably reluctant to look at lifting them without further back-up insurance. Of course, it is still keen on debt-to-income ratios, but the National Government effectively pushed that down the road and beyond the election through getting the RBNZ to consult on it first before any agreement was considered for including it as one of the options in the 'macro-prudential toolkit'.

Separately both Prime Minister Bill English and Labour leader Jacinda Ardern later poured cold water on the idea of DTIs. And indeed it's possible depending on the hue of the future government that there may be a push-back against the RBNZ's use of macro-prudential tools.

Also, there's the possibility the RBNZ's Policy Targets Agreement with the Government may be reworked - potentially removing inflation as the sole target of monetary policy and adopting a broader focus.

And, whoever forms the Government, it's likely that some move towards a formalised committee process for interest rate decisions will be established. Such a process has informally been in place at the RBNZ in recent times - but officially the decision is still that of the Governor and the Governor alone.

A new Governor would be good

All these kinds of issues will be occupying the mind and thoughts of the new RBNZ Governor. Oh, and that's right, we haven't got one of those yet.

It will be up to the new Government to sign off on a new Governor to replace Graeme Wheeler, who left in September.

The previous Deputy Governor Grant Spencer stepped up to the plate as Acting Governor for a six month term that will expire in late March.

Under Spencer then a steady-as-she-goes course can be expected. But it's difficult to see much inclination on his part to undertake substantial new initiatives - certainly not till there's a new Government in place and some indication when a new RBNZ Governor will be appointed.

What then if the Government doesn't get around to appointing a new Governor before the end of the year?

Well, that could be pretty interesting to say the least.

If a Government was up and running by the start of November and able to swiftly appoint a new Governor, then it's to be imagined said Governor may well still be able to take up their appointment by the time Spencer is leaving in late March. It does of course depend whether the appointment is internal or external.

A bit fraught

But leave a decision till after Christmas and things are likely to get a bit fraught. It's to be imagined that a lot of the decisions that will need to be made by a new Governor simply won't be able to be addressed.

Within all that then is what happens to the housing market.

With the uncertainty still hovering around who will govern the country, it seems we can now definitely kiss goodbye to any prospect of a meaningful rally in the market before Christmas.

After the 2014 election, when the status quo was returned to Government, the housing market exploded in the run-up to Christmas.

That would not have happened this year in any case, given the LVR restrictions on investors and the conservative line being taken by banks to new lending.

A quiet housing market

But the probability, with the way things have panned out, is that the market's now going to be real quiet up to Christmas and therefore, real quiet till probably March.

I think there is a risk that with the RBNZ not having permanent new leadership in place, and not even knowing properly what rules it will be having to abide by under a new Government, that the currently very tight regime on the housing market will be left in place for too long.

Now, with the market as it is at the moment, we are some way off (I would have thought) any suggestion of investors feeling pressured to sell properties. But if interest rates do, partly based on uncertainty, start to push up again in the new year, will this be a trigger for more investors to look to offload properties.

The risk then would be that the LVR policy - designed to stop sharp corrections in the market that might put banks under pressure - could actually lead to such a scenario.

Food for thought

I don't want to be alarmist. But I just hope people are thinking about these things.

The housing market looks fairly balanced at the moment and could probably tip either way.

It needs vigilance and responsiveness from the powers-that-be. With no Government and no permanent RBNZ Governor this is a far from ideal situation.

Whenever a new Government is formed, it is to be hoped that things like the new RBNZ Governor and the Policy Targets Agreement are given urgent priority.

Otherwise there is some potential for matters in the housing market to get away from us.

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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23 Comments

Not sure what any of that is alluding to except that the sheeple will far more at ease when they know which shepherd will be assigned to each particular domain.

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13

No current govt making decisions - don't worry pal.

National had 9 years and they did nothing, apparently there wasn't a crisis - whats a few weeks now?

Add the Labour period prior and we've had 18 years of doing nothing so yeah, what's a few more weeks?

Unlikely that a new RB governor would do anything too

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13

Matters in the housing market got away from us a long time ago.

as if the bottom dropping out is all to do with a few week delay in appointing a government - both sides are saying they will make it easier to build - build huge numbers of new homes and hey presto it will be ok suddenly - the market has stopped full stop and will find its own level based on a rather large number of factors - of which only a small one is the current government hiatus!

The RBNZ cannot afford to relax LVRs until NZ’s household incomes rise. The RBNZ has noted that the household debt-to-disposable income ratio has increased to 167 percent, above its peak of 159 percent in 2009. They see many households are vulnerable to an increase in interest rates.
The IMF has looked at how the growth of household debt affects an economy. They say that while there is a short term buzz from increasing private debt, within about 3 years those gains are reversed. Economic growth ends up being lower than it otherwise would have been. The IMF says that debt simply borrows growth from the future and in the meantime, and makes the financial system more vulnerable to catastrophic disruption. That is, the more indebted the economy is, and the faster that debt grows, the slower future growth will be, and the greater the odds of a financial crisis.
With the IMF raising warnings about high household debt, the RBNZ will breach its obligation to maintain financial stability if it raises LVR limits. It is arguable they should be made permanent, but if not the RBNZ would be irresponsible to lift them before household incomes have risen to significantly reduce the household debt-to-disposable income ratio from the current historically high levels.

The RBNZ cannot afford to relax LVRs until NZ’s household incomes rise

But income growth is growing at a snail's pace among the developed economies. Does anything differentiate NZ? Isn't that part of the necessity for immigration? To support business' need for cheap labor? Surely that would suppress incomes.

IMF is saying that raising incomes by allowing private debt to increase is a short road to financial crisis when starting from NZ's already high levels, so that is not a prudent response to low income growth.

Shouldn't the RBNZ impose a higher residential mortgage related RWA ratio to reinforce the IMF view?

Shouldn't the RBNZ impose a higher residential mortgage related RWA ratio to reinforce the IMF view?

As a measured response, that would make sense, but perhaps that perhaps mortgage lending is too important a driver of the national economy to interfere.

This, the ultimate cost of National's inaction over the last nine years, after promising action on the campaign trail.

The bailout... employers will all pay way more in wages....fakenews. The only possible way employers could all massively lift wages, is to increase the cost of everything, also called hyperinflation. Such a move would send most employers into bankruptcy, making that wage earner unemployed. Most working people would rather keep their job and pay less for their house (rent or mortgage).

Hyperinflation screwing everyone, or propery values retreat only hitting speculators and bank profits. Thats why enough people voted Winston and Labour.

No government and no Reserve Bank governor and the sky hasn't fallen

Then do we really need either of them!!!

The housing market is proving to be remarkably resilient......

And it's destined to stay that way.

TTP

A lot of people I speak with are optimistic about housing in NZ, with many of them continuing to invest. I feel sorry for the pessimistic doom and gloomers who will miss out.

PointMade (MTP)

More people investing in property is a bad thing.

I also feel sorry for the FHBs who are continuing to miss out. Can't let the ponzi die though. Property in NZ only goes one way. The Gubmint will even use taxpayer $ to prop you up!

Let it crash and burn. Houses are for living in.

Just to precis the last decade. We had a government that managed to ruin ordinary people's chance of buying a house by allowing prices to go beserk - but now we have no government at all things will get worse?????

This is precisely what happened to every western economy not just NZ. So its not just National govt. There are other factors, one main one, the creation of a shedload of money that is circulating the world and has come to rest on real estate.

Plus even more so, the GFC took real interest rates to negative territory and held them there for too long, thus boosting assets prices globally, especially those that hadn't had a housing market collapse during the GFC

Agreed. I dont think any govt could have stemmed the tide in the longer term.