By David Hargreaves
Sometimes the Reserve Bank proves to be more informative when it isn’t saying anything.
Such was an example this week.
The latest six-monthly Financial Stability Review offered, at first flush, little new information. But reading between the lines (and this is where it gets a bit hazardous in terms of defining exactly what the RBNZ’s intentions are) there was a lot going on.
Likewise, the IMF’s latest missive on New Zealand, which was released a day before the FSR was generally not much ado about not much at all, but contained this interesting passage: “Monetary policy has been focused on the primary objective of price stability. Only if financial stability risks become broad based and prudential policy is insufficient to contain them, then using monetary policy to ‘lean against the wind’ could be considered as part of a broader strategy to rein in financial stability risks. Even in this case, the benefits would need to be weighed against the output costs and the risk of policy reversals.”
After the release of the FSR, RBNZ Governor Graeme Wheeler was asked about this bit in his appearance before the Finance and Expenditure Select Committee in Parliament and responded that: “The possibility of us raising interest rates at this point to lean against house price pressures in Auckland is probably pretty negligible.”
My response to that is: Who said anything about RAISING interest rates? Was that what the IMF was actually saying?
Or was the comment more nuanced? Maybe I was wrong but I read that IMF passage more as: “Don’t hold interest rates at higher levels than you should because of the Auckland housing market.” The other point I would make is that when you are trying to be helpful and constructive, as presumably the IMF is, you might take a “now I know you won’t do this, will you?” tone – even if you know full well the person you are addressing has actually been doing or is contemplating that very thing. Positive reinforcement.
Some people may well argue that right now we have higher interest rates than we should exactly because the RBNZ has been “leaning against the wind”, when for ‘wind’ you can read ‘Auckland’. Such an impression would certainly not have been dispelled by Wheeler’s recent speech on the subject, in which he said that “housing market considerations do influence our thinking on the OCR”.
However, you choose to interpret the IMF’s comment, what did appear clear from the FSR is that the RBNZ has well and truly got the message now that it needs to be looking outside of monetary policy for answers to the housing market riddle. I would expect to see the RBNZ come under growing pressure from the Government in the next few months to start meeting its 1%-3% target.
So, in terms of the housing market the RBNZ is now ever more looking, not so much to a bag of tricks, as its box of Macro-prudential tools.
What also seems to be clear, between the lines, is that the central bank thinks it is on to a winner with the new emphasis, the ‘leaning against’ if you will, of residential investors. In that regard it is going to be most interesting to see what materialises if the sudden upsurge in markets such as Hamilton and Tauranga continues. Wheeler made clear this week the RBNZ considered that the main reason for this upsurge was buying by smaller residential investors (though it would be good to see some specific detail on that).
After hearing these comments I have changed my mind. I thought and have said so, that the signs of effervescence in non-Auckland markets would lead the RBNZ to reverse its recent lifting of the non-Auckland LVR ‘speed limit’ for bank lending to 15% and put it back to 10%. Perhaps not.
It seems to me that the RBNZ may well now be of a mind that the broad-based LVR policy will be less effective in future than specific targeting of investors. Therefore it seems entirely possible that the policy response from the RBNZ, which I think will be necessary, and will likely come in about March, will be to broaden the current Auckland policy of limiting loans to investors to no more than 70% of the value of the property being purchased.
But broadened to where? Will the RBNZ simply apply it to the whole country? Or would the plan be to simply apply it just to certain areas? The specific reference by the RBNZ this week to Tauranga and Hamilton suggested that perhaps the central bank is thinking of applying the policy to specific areas. If so this would have the potential to become a real dog’s breakfast. Surely a country-wide move would be the better idea.
Even then though, and I do say this as someone who was initially supportive of the idea of targeting investors in Auckland, this again smacks of a central bank doing something that should be government policy, if it’s done at all. What the RBNZ’s effectively doing by applying penalties against property investors is attempting to ‘lean against’ the tax-favoured nature of property investment. Arguably that is taking the RBNZ outside of where it should be operating.
If ongoing action is needed against the housing market to preserve financial stability (and only for that reason) then income to debt ratios might ultimately the fairest way to go. And while the RBNZ’s currently being fairly coy on this, I would expect to see such ratios added to the macro-prudential toolkit within the next year or so.
Such an addition would ensure that the RBNZ is well and truly tooled-up when it comes to tackling the housing market.
Whether this country can, however, ever fully protect itself long-term against dangerous investor-fuelled spikes in property values without government policy changes to level the investment playing field remains the open question.