Monetary policy worldwide has lost touch with reality. Photo / File
Monetary policy worldwide has lost touch with reality. Photo / File
OPINION:
When even real estate agents are saying house prices have gone crazy it becomes almost impossible to believe we will ever recover the Kiwi Dream.
That dream was not confined to young couples wishing they could afford a home of their own, it was shared by home owners whowanted everyone to have a stake in the country.
As Jacinda Ardern said this week, "The difference between some people becoming home owners is whether or not their parents can support them into a home. That is not the kind of divide we want in New Zealand. It is not who we are."
More concisely, National's new housing spokesperson, Nicola Willis said, "I don't want my kids growing up in a country where only the extremely wealthy can own a home. That's not the New Zealand any of us aspire to."
But they both know that is the New Zealand we have - and it has been this way for the best part of 20 years now. It was happening when Ardern worked for Helen Clark and Willis for John Key. They have seen rising house prices quickly recover from the global financial crisis and survive every attempt to contain them.
The Reserve Bank imposed loan to value restrictions (LVRs) on borrowing for investment homes, National introduced a bright line test for capital gains tax, Labour has banned foreign purchases of existing houses, set higher heating standards for rental homes, strengthened tenancy rights, extended the bright line test from two to five years.
The market slowed for a few years, not many houses were put on sale but prices held up. Then the pandemic arrived and everyone panicked, including the governor of the Reserve Bank, Adrian Orr and his monetary policy committee.
Having prematurely lowered the official cash rate to 0.25 per cent last year, they had little room to move and resorted to the buying bonds with newly created money, "quantitative easing", to stimulate the economy through the recession that was predicted to approach the scale of the Great Depression.
In May they removed the LVRs. With $50 billion of new money flooding the banking system and no restriction on residential property investment, nobody is surprised house prices have gone crazy. The greater surprise is that Orr and his committee doesn't want to do anything about it.
Reserve Bank Governor Adrian Orr says helping the housing market is not the Reserve Bank's responsibility. Photo / Mark Mitchell
In fact, they are planning to put more fuel on the fire. Last week Orr gave notice of a new $28 billion bank funding facility which will become available next month to encourage yet more borrowing. At the same time he said he might reinstate an LVR but not until March, which is expected to fuel the market even more this summer as investors get in ahead of the restrictions.
When asked about the implications of all this for house prices, Orr said this was not the Reserve Bank's concern. "We are doing what we are doing today, and always, for the purpose of the Reserve Bank's mandate and operating within its remit," he said. The bank's interest in housing costs was limited to the financial risk they might present for borrowers and lenders, hence the LVRs. "That is our concern, not house prices," he said.
Monetary policy worldwide has lost touch with reality. It was adopted here in the 1980s to deal with inflation and high interest rates proved very effective at that task. So effective that fighting inflation came to be the only purpose of interest rates.
But interest rates have not proven to be as effective at stimulating an economy. As Sir Michael Cullen observed this week, when interest rates are this low, lowering them further has nowhere produced much economic growth.
The same can be said of monetary stimulants such as quantitative easing. Countries that resorted to that after the last crisis were still on it when the pandemic struck.
New Zealand was not one of those countries. This country used to be an innovative practitioner of monetarism. We were the first to give a central bank statutory operational independence and a single focus on inflation with a stated target range. We gave sole responsibility to the Reserve Bank Governor and that worked well.
A good individual given sole ultimate responsibility for big decisions, can be more intuitive than a committee, less conventional, more independent. We had a succession of governors who could judge when to follow larger central banks and when to hold back.
Now we have a committee and its decisions are mechanistic, lacking agility. It seems not to have noticed the economy has rebounded from lockdowns better than expected. It cares less about house prices than previous governors did, though it was not in their remit either.
Ardern and Willis need to offer more than fine sentiments if their generation is ever to inherit the Kiwi dream.
