Our 'only hope' in creating financial stability in New Zealand
Less Reserve Bank independence and more political direction in the New Zealand housing market isn’t something I ever thought I’d hear myself advocating for. But here we are.
Changing the dynamic between the central bank and government is probably our only hope of creating financial stability with an element of social conscience. No more so than in the housing market.
Central bankers have been sniffy for years about their role and what constitutes financial stability. Besides monitoring banks and the payments system, it all started with controlling inflation so consumer prices remained stable. Then employment got added. Some thought it was a step too far to meddle in asset prices.
Extraordinary times demand that we can’t be static in our thinking. Justifications for strong Reserve Bank independence in the past were certainly valid and a proud moment in our economic history. It’s now obvious that in a world disaster, this independence is too rigid to represent real democracy – only politics itself can do that.
Financial stability is surely about providing a framework around things as basic as our payments system, grocery prices, our job and the roof over our head. These are basic human needs in any society. That’s why we mandate the Reserve Bank to monitor the capital of banks, keep inflation between 1-3 per cent and to support maximum sustainable employment. It’s only a very small leap to add the stability of residential property into this mix.
And here we have it. The Monetary Policy Committee must now account for the following new sub clause in its remit: “The Government’s policy is to support more sustainable house prices, including by dampening investor demand for existing housing stock, which would improve affordability for first-home buyers”.
Last Friday, the Treasury released a Reserve Bank Act Review, which gave information about the drafting of the new Deposit Takers Act. Page 18 makes clear the objectives:
“Prudential standards will include lending requirements (loan-to-value and debt-to-income ratios)”.
“Agree that a regulation pertaining to lending standards can be made by the Governor-General by Order-in-Council on the advice of the Minister of Finance after consultation with the Reserve Bank”.
“Agree to confirm the in-principal decision that additional matters that may be covered by prudential standards may be prescribed by regulations recommended by the Minister”.
It seems significant to see both of these lending ratios mentioned. So far only the loan-to-value measure has been used in New Zealand. The combination would have powerful consequences in controlling the mortgage market and house prices. These ratios are known as macro-prudential tools. It’s important for the Reserve Bank to have these tools because using interest rates to control housing has knock-on impacts for businesses, growth and exporters via the exchange rate. Looking at the other clauses it also appears that the government can have wide input into decisions, where it feels the political need.
Why is independence less relevant now?
There is an argument that in economies with very low interest rates, the effectiveness of monetary policy is more muted and it becomes important for a central bank to work more closely with government on fiscal policy (using the tax system). There have also been surveys where central bankers agree operational independence with monetary policy is the most important factor (being able to set instruments and operating procedures). Having political input in other areas is less relevant.
Due to a virus we have an unprecedented increase in our money supply (quantitative easing) and borrowed to keep jobs and the economy alive. Interest rates were pushed down, employment levels held up, but the side effect is rising property prices. We have to be honest, viewing house prices as a mere side effect is fairly insulting. There are huge social consequences for renters and our shared belief in a path to homeownership.
Rising asset prices aren’t New Zealand centric, but we are leading the world in terms of timing and the size of the inequality shame-o-meter.
The New Zealand problem
We have our own peculiar housing supply issue and that can’t be solved overnight. It will take years for substantial numbers of real houses to hit the market even though the government is putting a raft of measures in place to help. We can beat our chests as hard as we like and blame the ‘supply problem’, but these policy changes take time.
That’s why the ‘demand’ aspect of housing has taken on such dominance in recent months. It’s the lever that can take hold much faster and produce social outcomes that are fairer in terms of tilting the balance away from leveraged investors in favour of owner-occupiers.
Ballooning house prices are also creating an unstable and precarious rental market.
The proportion of landlords who have bought at high prices or have large mortgages, can start to control the narrative. Threats to raise rents at every tax, regulatory or interest rate change have worn thin. The rising gap in equality leaves all New Zealand taxpayers paying rent subsidies to thousands of families in need of social housing.
The residential rental market is mostly made up of amateur not professional landlords or property funds. This isn’t an issue, but we need high quality amateurs. Structurally changing this market with policy that demands better quality housing and more modest borrowing, insulates rental prices. By discouraging high leverage, we improve the financial strength of landlords and stabilise a core social need.
Political input in conjunction with Reserve Bank operational independence is the most democratic tool for ensuring asset prices don’t lead to financial and social instability.
Janine Starks is the author of www.moneytips.nz and can be contacted at moneytips.nz@gmail.com. She is a financial commentator with expertise in banking, personal finance and funds management. Opinions are a personal view and general in nature. They are not a recommendation for any individual to buy or sell a financial product. Readers should always seek specific independent financial advice appropriate to their own circumstances.