Jenée Tibshraeny: House price spikes of 2020/21 should’ve come as a warning

Reserve Bank governor Adrian Orr. Photo / Mark Mitchell

OPINION:

Reading the Reserve Bank's review of its response to the pandemic took me back to the summer of 2020/21.

I recall pulling up to a brewery north of Auckland only to be struck by the calibre of cars (or SUVs for that matter) in the carpark.

Teslas, Audis, Range Rovers, BMWs, and other luxury cars were almost exclusively filling the space.

Sure, this is hardly surprising given corporate Auckland's drift into Omaha and its once humbler surrounds over the summer months.

But I was still taken aback by the scale and concentration of expensive new vehicles.

We were in the throes of a pandemic, but people were clearly maxing out their mortgages and spending up.

Indeed, the Real Estate Institute of New Zealand's (REINZ) house price index went up by 9.3 per cent in the first three months of 2021, and 24.0 per cent in the year to March 2021.

The seismic amount of stimulus provided by the Reserve Bank and Government was keeping the economy buoyant in the face of extreme uncertainty.

However, one must question why the Reserve Bank didn't put more weight on what the spike in asset prices was telling it about the resilience of the economy.

The value of New Zealand's housing stock rose by 23 per cent to $1.5 trillion in the year to March 2021 – that's about four times the value of the country's annual gross domestic product.

Think about what making homeowners feel $285 billion richer in one year can do, either in terms of spending confidence or extra borrowing capacity.

Of course, it's easy to point the finger knowing what we know now. Those fancy car owners visiting the brewery in early 2021 weren't to know that later that year Auckland would endure a gruelling lockdown.

But as early as October 2020, the likes of former Reserve Bank chairman Arthur Grimes was ringing the alarm bells over house price inflation, and how very loose monetary policy was "destabilising asset prices".

Nonetheless, by November 2020, the Reserve Bank announced it would launch its second money printing programme, through which it would lend banks money cheaply to help them keep mortgage and term deposit rates low.

By this point, the Reserve Bank knew the REINZ's house price index had gone up by 6.2 per cent in the three months to September, and 11.1 per cent in the year to September.

It had already cut the Official Cash Rate (OCR) by 75 points to a record low of 0.25 per cent and printed $40b to buy bonds via its Large-Scale Asset Purchase (LSAP) programme.

The Government had also pumped billions of dollars directly into the economy through various supports, including the wage subsidy.

By February 2021, Grimes said the Reserve Bank should start tightening monetary policy. By July 2021, he claimed the Government and Reserve Bank had engineered a "wellbeing disaster".

In July 2021 the Reserve Bank stopped buying bonds via the LSAP programme. Then in October 2021 it started lifting the OCR ahead of most of its counterparts overseas.

While Grimes' view was more strident than many others – particularly earlier in the piece – he wasn't a complete outlier in flagging his concerns.

Fast-forward to November 2022, one of the peer reviewers of the Reserve Bank's internal review of its handling of monetary policy acknowledged a "potential indicator of loose monetary policy was the surge in house prices in 2021".

Asked why the Reserve Bank didn't put more weight on what house price inflation was telling it about the state of the economy in late-2020/early-2021, a spokesperson for the bank explained, "There was significant uncertainty about whether the strength in the economy would persist, and the Monetary Policy Committee judged that the balance of risks was still to the downside.

"Vaccines were only in an early stage of development, and the border was expected to be closed for some time."

Commenting on the matter in a press conference, Reserve Bank chief economist Paul Conway (who only joined the bank this year), said the strength of the economy only become clear gradually.

"The housing market is only one indicator that we have regard to," he added.

"We were weighing that up in the context of everything else that was going on in the economy at the time."

Assistant governor Karen Silk, who was at Westpac in 2020/2021, also made the point that the private sector was wary the economy was being propped by government support and feared what might happen once this was inevitably removed.

She said there was real concern around people losing their jobs and then struggling to service their debt.

These are valid points. And once again, discussing what happened in hindsight is much easier than making decisions when you're in the thick of things.

But one could reasonably argue the Reserve Bank should've put more weight on what the housing market was saying about the economy.

When quizzed about the housing market, Governor Adrian Orr has tended to argue it isn't the Reserve Bank's job to target house prices.

This is true. But it is the Reserve Bank's job to maintain price stability in an economy that produces multiples less each year than what the housing market is worth.

Housing-related data should be right up there with the indicators the Monetary Policy Committee closely monitors.

That said, opinion is divided over what the housing market currently says about the Reserve Bank's fight against inflation.

Is the Reserve Bank giving mortgage holders a large enough walloping to justify a slowdown in OCR hikes? Or have homeowners been made to feel so wealthy after years of low interest rates, the Reserve Bank needs to keep pouring quite a bit more cold water on the economy to curb inflation?