KEY POINTS:
Reserve Bank Governor Alan Bollard is warning that exuberant borrowers need to understand the risks they are taking and that the easy money floating around the world won't last forever.
In a speech to the Wellington Regional Chamber of Commerce Bollard reflected on the very strong growth in the flows of money around the world in recent years.
It has been driven by a glut of savings in East Asian and oil-exporting countries and persistent external deficits in countries like the United States, Australia and New Zealand.
This forum debate has now closed. Here is a selection of your views on the topic.
Alan McPherson
I agree with another comment that Bollard should be proactive, not reactive. It is easy to say "thats wrong, stop doing it" without offering a reasonable alternative for all the house buying investors. People who rent and who want to rent have to have a source of properties to rent. Who is going to provide those if not for property investors be they corporates or "Mums and Dads." If these people take their funds out of the property market it is not going to reduce the demand for housing and while demand exceeds supply there will be pressure on prices. Most of the cost of owning a house is in the value of the land much of which has been "landbanke"' by speculating property developers.
Fraser Smith
There is more to these interest rate rises than is let on. Higher interest rates here attract foreign investment and the Reserve Bank and the Government need that investment to help balance the books. The amount of overseas financial investment is scary. It's not a problem if that money is invested in industry, but the minute the NZ$ drops and becomes less competitive with other currencies, then the money will just be re-invested in other countries, leaving us with a greater Balance of Trade deficit than we have now.
Ray
Despite having only one tool at his disposal - interest rates, he strikes me as too short-sighted (gutless maybe?) to tell Cullen how it is: (1) Stop fuelling the inflation blow-out with programmes such as "Working Families" packages; (2) Free up land for housing at the same rate as demand; (3) Slow down immigration to balance this demand. Property taxes cannot be an option because true property investors (not the fly-by-nighters who have jumped onto the property bandwagon with little or no homework) save the government the huge cost of building expensive state housing with public money. Kiwis have a right to enjoy the prosperity created by a buoyant economy. Long may it continue. That is the only way we can stop Kiwis buggering off overseas to greener pastures (or browner pastures in Australias case).
A Bishop
Bollard should not concern himself with house prices, or the exchange rate. If house prices were "too high" then the market would take care of that as people switched to renting/flatting/left the country etc. If the dollar is "too high," then once a few exporters go bust the market will sort itself out. If business face increasing wage pressures then they should look at laying off staff, productivity improvements, or moving to a more profitable sector. No-one is forced to buy a house. No-one is forced to keep a business open at a loss. No-one is forced to pay a particular wage. But then, I am a renter who will be retired by 35.
Scott
Bollard is a school boy doing Cullens poddle work. Unfortunately tinkering with the OCR is a thing of the past. It does not work any more. Interest rates should be decided by the market, not the governement. The government needs to reduce its spending and size. There have been huge increases in government spending over the last several years without any relative increase in productivity. Bollard and Cullen need to do 101 finance again.
Peter
I think the answer is pretty obvious here. While everyone should agree that he is doing the right job by controlling inflation; he is however, not doing the job right. Bollard comes off as a very conservative and traditionalist who relies heavily on traditional monetary policies to control the housing market –such tactics used to work but unfortunately not in today's world – and it seems he still has problems accepting that. Mr. Bollard, you do not deserve to have your signature on any NZ dollar bill.
Stephen Keys
He has done too little too late. The punch bowl should have been taken away 3 years ago. Economists and politicians seem to think house price inflation is different from other inflation. It's not. It all stems from money supply growth (mostly mortgage credit) The real inflation rate before they remove half the stuff is around 10 per cent. Increase the banks reserve ratios and watch how quickly mortgage supply and demand drops off with house prices close behind. Maybe Cullen should bring back Don Brash!
Richard
What is the point of saying all these rubbish where action is not being taken to improve the situation. Increase interest rates lead to increase in exchange rates because of carry trade. Who cares. Easy money more important. Mr Bollard must do something to stop exchange rate from rising and decrease the trade deficit. Talk and warning and no actions.
Sunil
Absolutely Not. Raising interest rates now and then is in fact making the currency more lucrative for foreigners to invest in NZ for a higher rate of return and hitting export market as well. With such a huge Tax advantage to the property investors investors have a clear cut approach." We dont care about the interest rates till the time we get such tax advantage". This activity is in fact making housing unaffordable for a common man who wants to buy and live in the house. With the existing interest rates in fact in the near future number of renters will be more then house owners. In fact we are moving towards a capitalist society. Now only millionaires can afford a house. What about a person who is in verge of starting a life and wants a decent living?
Sam
House prices are determined by demand and supply - release more land at affordable prices and stop punnishing the tax payer. For only taxpayers qualify for home loans.
Khay Shern
In terms of Bollards policy to control house prices by raising interest rates, do we see the house prices falling? Since house prices and value of NZD are highly correlated, an increase in the interest rates would increase the value of NZD and hence increase house prices. This policy could well be rewarding rich overseas investors who come to NZ, using funds from their home country to buy houses here (and hence not affected by the interest rate hikes) and then watch their investment prosper as NZD increases and house prices increase.
K L Wong
How about is Cullen doing a good job instead? Bring on Real Property Gain Tax and high Statutory reserve requirement on Propertys Vendor and Bank respectively. The "Easy Money" blamed by Bollard has been ongoing more than 5 years ago now in East Asia Countries flush with funds to the extent that the Bank may offer interest rate at OCR minus 1 per cent.
John Cathcart
Bollard probably has been watching the sub-prime mortgage disaster with trepidation. No doubt it will not mean anything to the average Kiwi who are easily as stretched as the bottom rung of the North American mortgagee. As has been pointed out, the idea that a country grows rich by its citizens buying and selling houses to each other has been debunked. Just like the hoodwinked in American, Kiwis have been confident of rising house prices while spending money they dont have. In Americas situation, the loss of confidence, along with the loss of the dream, will have an impact in the real global economy. Bollard has every cause for concern when NZ wants to sell itself out for a shopping spree.
Colin
No Bollard is making a hash of it. The problem is not property investment but the government policies.
Raj Subramanian
In advising: Yes, fantastic." In action: nothing. Somewhere I heard from a successful business magnet "I tell my people what to do. I found that 25 per cent do that. My competitor used to tell his people what "not to do". He found that 75 per cent of them will try doing them. Net result: My competitor is no more in the business, gone bankrupt." I laugh at Bollard the competitor, fearing stability of his job. He has to address the Government rather than people for the problems. A Government who wants to penalise by additional tax the smart investors investing in foreign capital markets. A Government who never encouraged its own smart investments with good returns and steady capital growth. A Government who are opposed to technology growth and never encouraged smart industries to grow. A Government who doesnt want to cut taxes thereby cutting their own unproductive expenditure will not hear what Dr.Bollard says. Therefore he comes to us, the hard listeners. Tell us Dr. Bollard what to do, and not what not do!
Andy
Bollard may be doing his best to make numbers balance - but what a heartless, narrow-minded approach! These are not just interest numbers being played with, they are one of the most significant factors in a whole realm of issues in the quality of family life in NZ. My generation of kiwis are house renters because we cannot service the mortgage payments on even a dump of a house in an unfavourable neighbourhood of Auckland. And those of us who have been saving since high school are not able to start families till our late 30s for fear of losing half the household income. Come on Bollard - have a heart!
Andrew Straw
I do not think Bollard is doing a good job. He is over-concerned with inflation and house prices, and his response is to punish everyone who has a mortgage by raising interest rates to high heaven. If he wants to bring prices down, he should suggest strongly to the government that they institute a hefty capital gains tax on all investment homes that the owner does not intend to live in. The Reserve Bank should be much more deferential to the needs of the average new homeowner, who is paying hundreds of dollars extra a month due to its high interest rate policies.
Chris
No, he has failed. What even he seems to have forgotten is that any changes in interest rates he makes take at least 18 months to kick in. With the majority of home lending sitting on fixed rates and the average term to maturity being 1.6 years he is being a complete ass to try and stamp on things now. He mad a big mistake in fueling the fire when he cam into office by cutting rates by 0.75 per cent and now he's dealing with his own mess. He should leave things alone. He complains that he doesnt have the right tools to do the job, but the fact is he does not know how to use them. Anyone else making the gross errors in judgement he has would have been booted out long ago.
Ewen Castle
I do not agree with Mr. Bollards policy. The policy will not control house prices. The policy will make our dollar more attractive to overseas lenders. The policy will cause our dollar to rise. The policy will reduce returns to our exporters. The policy will reduce our standard of living. I would like to see Mr. Bollard take some advice from BERL.
Denver Leung
First, Bollard should have known it would not help by increasing the rate by 25pts. It would just push up the NZD without helping to cool down the inflation pressure, and in turn, by adding more pressure to the farmers and export sectors. He should be more decisive and more independent (without influencing by the Labour govt) on introducing capital gain tax, just like what California is doing, and other more effective measures. For example, reduce tax rate on interest gain on saving. On the other hand, to integrate with AUD is a very sensible vision. However, it will be difficult to convince many no matter how practically correct is such move. At the end of the day, what has he contributed as the Reserve Bank chief? He is just being controlled by the market, and speculatively being too soft on the Labour govt.
Mario
He is very right. The borrowers are definitely going to feel the pinch sooner than later.
Munster
Is Bollard doing a good job? No! How he can justify punishing Mum & Dad home owners like me who are struggling as it is to cover ever increasing costs like School fees, petrol, medical bills. We don't need the punishment that will hit us when we next rollover our fixed home loan. What is that going to achieve? Well, school fees will probably be #1 on the dont pay list. I am not an investor, just a regular home owner. If you want to target the investors, add a surcharge for non-owner occupied mortgages.
Jonathon
Bollard is doing a good job. Inflation must be kept under control to ensure a stable environment for businesses and consumers. The problem is that expansionary fiscal policies are not helping and that we need to bite the bullet and introduce a capital gains tax on property to reduce the speculators/ professional investors in the housing market and reduce demand and prices. This would also reduce peoples wealth affect from their property and would encourage other savings.
Banker
It is a multi pronged approach this monetary policy business. On the one hand, we have the general populace of NZ who are happy to take the cheap money handouts that the major banks, and second tier lenders are all too happy to give away. The populace then goes and spends massively, buys 5 houses, rents out 3, lives in one and does the other up for speculative gains. Then they run out of money, apply for credit cards, get them, use them excessively to finish the renovations and pay for their living costs, then top up their mortgage to pay off the credit card debt. We have Cullen who is at least trying to make Kiwis save with Kiwisaver, of which no one knows how it will pan out. This government may be inflationary, but at least it has one of the best surpluses (savings) in recent times. Stop blaming Labour for being inflationary, and start thanking it for thinking ahead, as when the overstretched bubble finally pops, they naysayers will be thanking Cullen for the fact that NZ will not quite be as bad off as the 87 crash, due to surpluses. Bollard, at the most, has never really extended his talons enough. He should have done more, sooner, but has not. In all eventuality, the only people to blame for the current "fiscal" crisis, if it can really be called that, is the general public. Joe and Jane Bloggs. Start saving, stop applying for a credit card every 5 minutes, stop buying houses, pay IRD what you are supposed to (be cheaper than paying the accountant!) and then we will start to see inflation work its way down toward the 2 per cent band.
Jon
No, he has not done a good job over the last 6 months. He persistently warned as to the risks of inflation and threatened to raise the rate but did not do so. He missed the perfect opportunity in October and December when so many people were re-fixing their fixed rates and the market had already priced in a rate rise. Now the OCR rises will take even longer to bite, keeping our currency stronger for longer. He has been overly preoccupied with the housing market when the root causes for the problem lie outside his control.
James
People need to realise that Bollard is doing what his job requires. From reading some of the other views of readers, it is obvious that some of them do not know that one of the main aims of the Reserve Bank is to keep inflation between 0 per cent and 3 per cent. When it appears that inflation is going higher, Bollard has no choice but to increase the official cash rate - to curb the spending sprees that it seems everyone in New Zealand is putting on their credit card these days. And when the OCR increases, so does the rate of interest on both savings and credit cards making it more attractive to save and less attractive to spend money on your credit card (not to mention that people with mortgages or loans etc have less money to spend). This of course does lead to having high exchange rates (because when NZ has high interest rates, it is more attractive for overseas investors to invest in NZ). However, exchange rates are not part of the reserve bank fiscal policy - inflation is. Bollard is doing his best to control inflation - but the Government needs to update its policies so that a complete view of what will happen is shown. Because with high interest rates, high tax rates, high exchange rates. the economy is not going anywhere. We will probably become a socialist state.
Zaen
I think the actions of Allan Bollard are limited by the tools he has to work with. I think the major problem is not in the monetary policy but with government policies. Current government is probably not helping in Mr. Bollards cause. It appears that the government is too keen on making Bollard the scapegoat. In my view, to run an economy, it takes all parties involved to tow the rope. For example, to help control the housing market, Capital gains tax should be introduced on a graduated level where if properties were held for less than a specific number of years, it would be charged CGT graduated downwards the longer they hold it. This would protect family homes and discourage speculators. To implement this is not the job of the reserve bank but the government. It seems to me that the labour government is unable or unwilling to do so to avoid being unpopular. If they are serious about controlling the economy, they should stop pointing fingers at others and do their jobs!
Letta Smith
And so the average N.Z. taxpayer gets pinged again, If I was Bollard, I would ping/surcharge the overseas (not NZ) investor by half to 1 per cent that invest their money in NZ for straight interest rate returns. And drop our rate, which now is affecting every home/business owner. Make business more attractive and not housing, unless a business. Commercial businesses are pinged in Hamilton 3x times the domestic rate and pay extra for water and rubbish etc. Then there is all the indirect taxes and I wonder whom do I work for. What saddens me here in NZ is the extreme squandering of money in government agencies with all the hierarchies, the PC baloney and as the CIS report says we are no better off, in fact I would say as a society worse. Thanks.
Frank van der Zwaag
It shows you that NZ needs to become a closer part of the Australian economy. There should be one currency.
Chris Randal
I take the strongest possible objection to this guy earning a 6-figure salary making decisions that impact badly on those of us earning the average wage. He needs to be thinking of the lower paid, not looking after his mates in the corporate sector!
B Baines
No, certainly not. 18 months ago, he sat on his hands and let the situation get away from him, then panicked and upped the interest rate many times. More earlier control would have been more mature. We now have a dollar being pushed higher by the increases in interest rates, borrowers having to find more money to keep their homes and looking for higher income as a response, unions acting for employees after more income, exporting companies loosing market share because of the higher exchange rate at the same time having to deal with higher income demands. The minister of finance is waiting for the reaction and will blame Bollard. What a mess. A stitch in time would have been much more appropriate. He is bordering on incompetent.
New Zealander
Bollard is a clown and has no idea what he is doing, He puts up interest rates so people have less money in their pocket, so they then spend on their credit card and then when their mortgage comes up for renewal, they add credit card debt to their mortgage and pay off over 30 years. He has also mention we should invest in local business, shares etc local market, not buy property, Great, lets invest in Feltex Carpets.
Jeremy
Bollard needs to stop harassing ordinary citizens about the inflation rate. Seriously. It is not our fault and we can not do anything about it! The real culprit (if you think the "problem" is even serious, which I do not)is the Labour Government. Labour Governments have always been inflationary and this one is no exception. That is what happens if you have an economy based on created jobs, excessive taxation and excessive Government Sector spending. More people have money and the inflation rate soars, whilst productivity declines. Well the Government Sector is hardly "productive" is it?
Rex
No, he is not doing a good job. A lot of people are on fixed incomes and every time Bollards name is mentioned, I shudder. In the last two years, my repayments on my house have increased far in excess of any pay increase, all because of his interference in the so-called interest rate. plus there are all the other increases, eg, train and bus fares etc.
Sharon Viti
NZs economy has been controlled by external influences for at least the last ten-fifteen years. As such Alan Bollard has little influence. New Zealanders have been living in never-never land for at least as long as that.
Terry Woods
No, Alan Bollard has not been doing a good job. But finally at least he is considering other methods of controlling the run away housing market. Locally, in Napier, bare section prices are astronomical and sections without nonsensical covenants are few and far between. There is no shortage of land close to town, just a shortage of land suitably zoned for subdivision. I say free up more land! After all, we still have a growing population. Perhaps this means intervening in how council planning operates.
BJ
He is doing what he can with what he has got. The problems here stem from Cullens office and the reluctance to correct inequities in the tax and benefit scheme coupled with the LAQC. In short, upper middle class investors facing a confiscatory 90 per cent effective marginal tax on every investment except a house are opting for the house every time. Renting it out slashes their tax liability massively, sometimes to the extent that the house itself is effectively free. No interest rate change will alter that equation, the interest is part of the deductible cost. The people who pay for this largesse are the other taxpayers, and as the house prices and loan sizes surge higher the only people laughing are the Australian bankers.
Peter
Yes, he's doing a good job, people need to stop spending and start saving. The property bubble is a disaster waiting to happen and when it does burst, there are going to be some casualties but the longer it continues the worse it will be. Bollard is doing the right thing by trying to stop it now.
Leonard Lee
We have got a bunch of old people using antiquated fiscal policies. The old ways do not work in the global economy of the 21st century. Fiddling with the cash rate in a small country like ours will not do squat when you look at the big picture. Using the OCR as a hammer? It is not even that sophisticated. There will always be easy money out there - but not necessarily here in New Zealand. Businesses here will struggle, people will get relatively poorer due to low wages and high taxes. By then, those in power would have retired or passed away, leaving the current generation in the dog house.
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