Bollard won't curb housing 'bubble'

By BRIAN FALLOW

Reserve Bank governor Alan Bollard sees something of a "speculative bubble" and "excessive exuberance" in the housing market.

But not enough to warrant any special action by the bank over and above the ordinary workings of monetary policy to control consumer price inflation, he said in a speech to the Canterbury Employers Chamber of Commerce yesterday.

"In terms of the day-to-day controlling of consumer price inflation, housing is still the biggest thing being faced at the moment."

But Thursday's interest rate increase was just part of the normal operation of monetary policy to ensure continuing stability in consumer, as opposed to asset,prices.

In rare circumstances, the bank might act to let the air out of an asset price bubble but "this carries risks and is difficult to do".

Bollard reiterated last year's warnings against the belief that house prices only rise and someone can always be found who will pay more for a property.

"There are elements of speculative bubble behaviour present in recent house price developments. While that bodes ill for some individuals, however, it does not seem at this stage to be large enough or of a character to generate significant fall-out for the overall economy when the correction happens - as it will."


Speculative bubbles were damaging while they inflated, through distorting the allocation of resources, and when they burst, through the impact on economic activity, confidence and potentially the financial system.

But even if a central bank could be sure that an asset bubble was developing, it faced the difficulty that interest rates had limited power to affect the perceptions that moved asset prices in the first place, Bollard said.

"To materially affect some asset prices, such as housing, interest rates might need to move quite abit."

Timing was also problematic. "Because of the lag of one or two years that we think applies between an interest rate move and its effect on the real economy, the risk is high that policy moves would be mistimed and only make things worse.

"If interest rates are high at the moment a bubble bursts, those high interest rates will still impact on the economy two years on. This would make the landing harder."

Despite the difficulties and risk, pushing up interest rates to combat an asset bubble could sometimes, though rarely, be justified.