Finance Minister Grant Robertson is proposing to require the Reserve Bank (RBNZ) to “avoid unnecessary instability” in house prices, as it works to meet its inflation and employment targets.
Robertson wrote to RBNZ Governor Adrian Orr on Tuesday, asking for feedback on his suggestion to tweak the wording of the Remit for the Monetary Policy Committee (MPC).
The Remit, published in February 2019, is issued by the Finance Minister under the Reserve Bank Act.
Robertson would like to change Section 2b to say, “In pursuing the operational objectives, the MPC shall… Seek to avoid unnecessary instability in output, interest rates, the exchange rate, and house prices”.
Currently, the Remit doesn’t include the words “house prices”.
Robertson asked Orr for feedback on the suggestion, saying he also welcomed views on alternative proposals “with regard to the Reserve Bank’s monetary or financial policy that would help address our concerns”.
“I am concerned that the recent rapid escalation in housing prices, and forecasts for this to continue, are affecting the Government’s ability to meet the economic objective set out in the Remit," he said.
“I am also concerned about the potential that these price increases may present a financial stability risk to the economy, particularly when monetary policy returns to more normal settings.
"Housing price instability is harmful to our aims of reduced inequality and poverty, and is also likely to negatively impact the Government’s aim of creating a more productive and inclusive economy."
If changes are agreed upon, Robertson said he wanted them implemented soon: "I would request that you gave it your earliest possible consideration", he told Orr.
The New Zealand dollar jumped from 69.3 US cents to 69.7 US cents on the news. ANZ chief economist Sharon Zollner said this indicated the market expected OCR cuts to be less likely.
Robertson stressed he wasn’t proposing changing the MPC’s price stability and employment objectives. He also underlined the importance of RBNZ independence.
Taking some responsibility for soaring house prices, he said he directed Treasury to consider further demand-side measures to address asset price inflation.
These could include re-looking at the bright-line test. Robertson reiterated the Government’s commitment to not introducing new taxes.
He directed Treasury to report back by the end of the year.
See a copy of the letter Robertson sent to Orr here.
By way of background, the Policy Targets Agreement, which preceded the current Remit, required the RBNZ to "monitor" asset prices when conducting monetary policy.
However Treasury recommended the words “asset prices” be removed. Its advice to Robertson in 2018 was:
"[T]his requirement to monitor asset prices is not a good fit with the PTA as it does not relate to the policy target. It could also be argued that the reference to asset prices is superfluous as it is covered by the requirement to have regard to financial stability which is included in the Act and the PTA. On the other hand the provision is not harmful given the Bank will need to monitor prices in order to fulfil its functions. On balance, we recommend removing this clause as it is unnecessary and would assist in simplifying the document."
Here's a copy of a press release from Robertson:
New Zealand’s stronger-than-expected economic performance has flowed through to housing demand, so the Government will review housing settings to improve access to the market, the Finance Minister Grant Robertson announced today.
“Our focus is on improving access to the housing market for first home buyers and ensuring house price growth does not distort the effectiveness of our overall economic rebuild – which we want focussed on the productive side of the economy.
“We have been clear about the policy responses that we are not prepared to consider, but there are other options that need to be investigated.
“Overly restrictive planning rules are one of the causes of high house prices and the replacement of the RMA is a priority to address that. We will build on the National Policy Statement on Urban Development and examine other potential barriers to affordable housing. Minister Woods is working on new and innovative ways to increase supply.
“I have also sought advice on further demand side measures that can add to the initiatives that we have already taken. I expect to receive that advice towards the end of the year, and will discuss it with Cabinet as soon as possible after that,” Grant Robertson said.
“Today I can also confirm that I have written to the Reserve Bank Governor to seek his advice on possible ways the Reserve Bank can support the Government to meet its economic objectives, in particular with relation to house prices. One proposal I am seeking advice from the Reserve Bank on is whether to include stability in house prices as a factor for consideration in the Remit when formulating monetary policy.
“With an extended period of low interest rates, and some time before housing supply can catch up with demand, now is the time to consider how the Reserve Bank may contribute to a stable housing market. Undertaking this work is not to suggest the Reserve Bank bears responsibility for house prices, but simply that it should have regard to something that is influenced by monetary policy.
“I want to be clear I am not proposing any changes to the mandate or the independence of the Reserve Bank.
“I want to acknowledge the Reserve Bank’s approach during COVID-19 has served New Zealand incredibly well. I continue to support its independence and mandate. It is critical that it takes, as the Remit asks it to, an approach that looks beyond the short term,” Grant Robertson said.
177 Comments
Are the RBNZ to be expected to consider a multitude of conflicting and disparate targets which will result in an exceedingly difficult task becoming impossible to achieve?....if ever an example of why politicians need to be kept away from monetary policy was needed this is it.
The gov continue to attempt to shift the blame for their own lack of courage and imagination....hopeless.
No problems with proposal at all.
Current house prices, rate of house price inflation and growing risk of correction is in nobody’s interest.
This makes sense for FHB in terms of increasing prices, both homeowners and investors due to risks of servers price correction, and the wider economy in terms of price stability.
I really can’t see anyone really being realistic and honest to themselves disagreeing.
MTP
Agreed. RBNZ has a variety of tools which they can tweak: LVRs, possible DTI, FLP, OCR, and QE.
Possibly - note “possibly” - FLP could have constraints on purpose of bank lending, proposed reintroduction of LVRs would slow the market especially with very high LVR for investors, we may not see negative OCR all of which could act as breaks on housing. Introduction of DTI ratio would ensure this.
Currently inflation and unemployment rates are surprisingly positive and better than expected so less need to support house prices as a tool as initially thought.
Eight months ago RBNZ were expecting a fall in house prices of 10%, now increase of 10% so have considerable room to move on those actions previously taken to support housing (e.g. removal of LVR and OCR cuts).
I posted some four or five weeks ago that I saw need for RBNZ actions to cool the house market and I saw a flattish market next year as a result. I still hold that view.
Bingo HeavyG - it doesn't....(in my view).
I don't see how they can achieve it without the economy collapsing in upon itself. We are so reliant now on prices increasing that if they do not, the economy tanks, wages fall, defaults on debt rises and it could be a big nasty spiral.
We should have been having this conversation around 2013 in my view - but we decided having the worlds most expensive houses was worthy of celebration. We make the bed we sleep in so lets sleep in it I say.
Heavy G...
Adding to what u say....
The underlying reality is that credit growth is what drives our economy..... ( Probably needs a minimum of 5% credit growth/ yr....thou with ultra low interest rates, maybe less..??)
Shut that down and we fall into a recession.
If the credit growth is not in the household sector ( housing ) , then it has to be in another sector.... Problem is that as that new credit flows into someones income/profit , much of that ends up invested in Real Estate/Land...
This is a problem beyond the abilities and will/desire of both Robertson (Labour ) and Orr...
DTI is a flakey way to discriminate who can borrow and who cannot..... What ratio do they use..?
With 2.5% mortgage rates a DTI that might have seemed reasonable 10 yrs ago , would be ridiculous now.
I think the fundamental problem ( disregarding structural issues ) is that the RBNZ really, very badly , got it wrong to how low and how hard they went with lowering interest rates , QE and super cheap loans like the FLP..
It has never been easier ( last 20 yrs) to service a mortgage... https://www.rbnz.govt.nz/statistics/key-graphs/key-graph-household-debt
It has never been harder to make meaningful income from term deposits ( I have elderly friends who are rotating out of Term deposits and into real estate, via partnering with kids/grandkids.)
RBNZ, hand in hand with the Labour Party, going into an election...thru caution to the wind.
The whole COVID thing came in out of left field as a complete unknown... so I can understand why they responded like they did..
AND... I do blame them for not responding sooner.... ( Labour had an election to win.... RBNZ was blind to the consequences of their actions ).
The quick fix is to raise interest rates..... if even just a little bit.
Great work Jenee & team. Interesting to see Robertson's frank reference to the impact on financial stability. Especially with your reporting that Treasury earlier thought the blindingly obvious didn't need saying ("reference to asset prices is superfluous, as it is covered by the requirement to have regard to financial stability"), but evidently it does.
Tricky for any Govt inheriting this particular can, kicked down the road for two decades and now of petrol tanker proportions, with two dirty great holes in its side (the old one from tax distortions, and the latest by slammed down interest rates and massive QE).
Guess RB's response will tell if they see themselves as a firefighter helping extinguish an accidentally lit fire, the arsonist with match in hand calmly watching the explosion and counting the bodies, or the scientist seeing the experiment to its natural conclusion, dispassionately recording what happens when an exploding petrol tanker is pushed off a cliff into a city (economy) below.
If it is not RBNZ jobs than whose job is it as our PM says not their reponsibility
https://i.stuff.co.nz/national/the-detail/300165796/the-detail-is-it-re…
Labour government has no intent and is hand in glove with Mr Orr.
alittle
Whose job has it been until now?
Well RBNZ hasn’t had a significant explicit mandate for responsibility - house prices are a secondary consideration in terms of financial stability. The reality is that house prices have not been a significant measure of their effectiveness such as inflation targets.
The Government itself has not had the tools to effectively deal with it - house supply such as KiwiBuild have been a failure.
Hopefully this move will contribute to addressing the current issue.
Sounds good, the symptom crippling the working careers of NZers gets a mention in a letter. This must be what it's like to be "concerned about house prices"
Perhaps the $28 billion being pushed into houses via Funding for Lending could be better spent on....
* Twenty Transmission gully projects
* A single giant "affordable" house
* Removing tax from fuel
* an ebike for everyone in NZ
Bizarrely, when the NZ Bank spends billions buying Treasury bonds, they end up owning those bonds and Govt basically pays interest to itself. The whole idea of the Bank being independent is a nonsense - think of the Treasury as the Govt's right pocket, and the Bank as it's left pocket. When you move money between each pocket, you don't get any richer or poorer - the whole thing is an illusion.
by Audaxes | 29th Aug 20, 12:54pm
RBNZ - "The bonds sit on the RBNZ balance sheet until either, 1. They mature, or 2. They are on sold."
Banks need to be in receipt of the debt redemption proceeds to extinguish the deposits they extended to the government when the bonds were initially monetised in the public banking system.
When you move money between each pocket, you don't get any richer or poorer - the whole thing is an illusion
It might seem like that but there's a small difference. These asset purchasing operations are done in the open market, meaning central banks also buy bonds from existing bondholders, driving yields for risk-free government bonds down. In theory, that's supposed to increase liquidity for more productive parts of the economy.
The Treasury could also use the debt markets to fund infrastructure investment and expand social services, boosting the economy with fiscal easing in a recessionary environment.
However in practice, LSAP pushes more lending into other seemingly low-risk assets, which in NZ banks' context are real estate mortgages.
Yes, I appreciate the nuance. I also completely agree that a more direct and efficient stimulus could be achieved through fiscal policy - i.e. investment in social services and infrastructure projects - carefully chosen to ensure the efficient use of fallow labour. I would question though whether the increased lending is going to other low-risk investments - in the UK QE has led to significant increases in share dealing and the stats here look similar?
Just ban interest only loans on residential property investment! This will be more effective in preventing people from owning multiple investment properties than any other suggestion I have read on interest. To be fair and provide stability existing properties can continue to be refinanced on interest only as per bank requirements but no new interest only loans on residential property investment.
Exactly - that's why the RBNZ followed market rates down by cutting interest rates in half five times since July 2008.
What else can a central bank overseeing a building society banking system, concentrating it's lending efforts on non-GDP qualifying collateralised, but nonetheless leveraged asset sales and purchases do, without injecting actual liquidity into the real productive economy? Adjusting the present value discount factor of perceived future residential property asset cash flows downwards is not a viable nor sustainable substitute.
Land tax is needed - its unavoidable and simple, and that is why Local Govt uses it. Offset with tax free $25k, and then a lower flat tax there after. Lets promote productivity vs idle debt speculation. I also agree that interest only should not be something that's available, and that a Dti limit should apply for rentals as well.
Spot on - it is politically convenient to blame supply (and sellable to the bloke in the pub), but it is *demand* that is driving house prices silly, and that demand is a function of credit, rental yield, interest rates, and, ironically, confidence in house prices.
But they already are considering house prices! WTF!
It was decided that they shall never fall ever - didn’t we just witness that this year? You can’t have it both ways.
Both the government and the reserve bank want to have their cake and eat it too...but as they will learn, that is not how the world works.
Imagine if the public knew that 65% employment rates is considered the 'maximum sustainable level' - that's nearly 1 million people not working (and at least 150,000 of those people looking for work that isn't there). Makes a bit of a mockery of the idea that hundreds of thousands of people can 'work their way out of poverty'!
We are panicking now arn't we Grant. Two wrongs dont make a right. If you hadn't fiddled and put employment in there earlier what would we have right now? Higher interest rates and lower house prices. If you want to help employment stop making it so hard for businesses to create new jobs, bring back 90 day trial for a start.
Im curious to know what they are suggesting would come out of a bright line review and what effect that would have. At the moment in my experience it is creating more land-banking so reducing supply.
Whose playing who here? Is Orr 'playing' Robertson? Or visa versa? They agreed on the spend-up earlier this year!
Does Orr want a change to his remit by creating this price inflation in the housing sector? Or does Robertson, by giving Orr the 'Green Light' to print!
This all suspiciously seems as bit fishy? It also makes the Government books look good in next years budget when Robertson will claim victory for dodging a 'Covid' (economic) bullet!
What a crock of bull dust. Labour have no ideas so lets pass the buck to Orr. So nothing will get done that is constructive and the mess will continue. It is the Government’s job to control the demand the side eg population growth and the supply side by making more land available and easier to develop (but not to the detriment of the of the environment or quality of housing). In population I include any one living in the Country including temporary visa holders, tourists etc. It is the demand side that needs attention and covid has given Government an opportunity to set a sensible future direction. To remove current property speculation no tax deduction should be allowed for interest on all mortgages written for the purpose of residential property from 1 January 2021.
I want to see prices fall, but I also don't want to see recent FHBs take a bath in a market driven to frenzy by investors. Just pretending wiping out young people financially is "no problem" is irresponsible, especially when we have the chance to design a soft landing (or even some form of equity insurance) targeted at them.
Yes, it is a flawed line of reasoning, I mean, if house prices have gone up 15% this year, then why shouldn't Govt. policy support that going forward.
But in doing so the moral hazard is huge, there becomes no responsibility or negative outcome for any risky behaviour taken.
Although having said that, many FHB have been lead into this position by the Govt. so they (the Govt) need to be held responsible.
And regardless of how we got here, how do we get out of it - all of us. If you were to enact a reset, then those people that have purchased closest to that are the most disadvantaged, and to lesser degrees are the timeline extends back. And not only does it capture people's savings, including the possibility of KiwiSaver, but the parents that have provided equity/security that they will need for their coming requirement. It's a real house of cards.
But is it possible to ringfence those affected so the loss can be stabilized to the point it does not provide a tipping point for the rest of the economy, and while not rewarding these people for their behaviour does not punish them either- Helen Clark Foundation thinks so.
https://helenclark.foundation/wp-content/uploads/2020/02/somewhere-to-l…
To quote: 'Refinancing: a progressive refinancing scheme could reduce household debt burdens for the primary home, to mitigate the risk of negative
equity resulting from changes to taxation and mortgage lending.'
Yes, it was JK that allowed people to dip into their retirement savings as though it was a rainy day fund, but at the same time saying there was no rainy day and we were a Rockstar economy.
Re 4% contribution - talk about the circular economy - give them 4% which they can withdraw to increase demand on housing which causes house prices to increase, which means the income you pay people does go as far as it ought to, so they need a wage increase.
The point it, their mortgage amount won't change, they'll be on the ladder and they can pay it off over the same window, not just be worried about a paper loss of value. They'll have a home. If their mortgage rates increase because of less equity, well the bank shouldn't have loaned them the amount if they hadn't applied a stress test, which many people here say they do at a rate well about ticketed rates.
Capital gains only really matter if you're leaving the region, or downsizing to free up capital for old age tourism.
That is one of the funniest arguments I have heard for a while - not sure if you humor is intentional or not ..
If "their mortgage amount won't change" means there would be no problem we do not even have a problem to fix in the first place - housing affordability measured as ratio of incomes to mortgage service costs hardly moved over the last few years ( due to a dramatic drop in interest rates + modest income growth offsetting price increases .)
The point it, their mortgage amount won't change, they'll be on the ladder and they can pay it off over the same window, not just be worried about a paper loss of value. They'll have a home. If their mortgage rates increase because of less equity, well the bank shouldn't have loaned them the amount if they hadn't applied a stress test, which many people here say they do at a rate well about ticketed rates.
Capital gains only really matter if you're leaving the region, or downsizing to free up capital for old age tourism.
Here's a suggestion, Grant and TSY. Rental price controls.
I'd suggest the formula (RV/1000)+10% = weekly rental maximum price. Reviewed annually for CPI rise; and tri-annually in line with the RV rise.
Such a control will immediately cool the price rental investors are prepared to pay. And that ought to cool the market down considerably as well.
Application of the formula starts with each annual rent review for existing properties rented.
Especially considering most rental properties, based on equity positions, and lower debt costs due to interest rate falls, are not affected by price rises needing for them to increase absolute income.
The questions to ask, Is this recent increase now baked in, or is the RB going to do something that will reverse the last 4 months of price rises? What is the goal here?
You're quite right on the first point.
On the second, my goal would be for lower income working families to be able to house themselves without government assistance.
I suspect only the government that can prevent these last 4-6 months of rises from becoming 'baked in'. And that to my mind requires rental price controls, perhaps coinciding with the government announcing the staged reduction in accommodation supplements.
I think we need to start taxing the shit out of property investors who purchase existing stock, removing it from owner occupied and turning it into rental accommodation - they are simply pushing the equilibrium point up by adding demand to a market that doesn't require it.
Or even better....
I think we've had this discussion before Kate where I think the best solution is to prohibit property investors buying existing dwellings, allowing only the renting of new builds from here on in (creating supply to the rental market). Watch as prices regulate as FHB's no longer compete with property investors to buy their owner occupied homes and it gets them out of the rent trap while more and more rental properties are built, adding supply to the rental market and pushing the equilibrium point down in that market. It makes sense (to me) from many perspectives.
To me, a tax to control behaviour is like a parent smacking their kids to get them to behave. For some political parties that is the only form of discipline they know and for others they wouldn't use any form of force as a last resort to save the child.
The Govt. is acknowledging they are a bad parent as soon as they reach for the tax stick.
allowing only the renting of new builds from here on in (creating supply to the rental market).
It is great in theory, but new build costs will always exceed existing stock prices - it's the reality of depreciation. So, rents would remain unaffordable (and become even more unaffordable). Hence, aspiring FHBs would never be able to save for a deposit.
Besides, there is already some 30% of all housing stock in rental stock by the private sector owners, I think. And one could not force those sales.
To me the only way is rent control, as you have to start affordability at the bottom of the housing ladder - so that everyone can be lifted up and out.
Ban the purchase of existing dwellings for rental stock....property speculators can only lease new builds from here on in.
Adds supply and reduces demand in each respective market and kills two birds with one stone. No new additional taxes and will likely shift the equilibrium point in the right direction for each market (owner occupied and rental).
I'm okay with people purchasing houses to rent - so long as the price they rent them at is reasonable/affordable for the tenants. Hence a regulatory formula is needed. That will prevent those purchasers from going over-the-top on price - as effectively a maximum rent is fixed. What I'm seeing presently is the rental price is just set to whatever is required to make a viable rental yield - and of course existing rental property owners simply increase their prices according to the market rate set by these new investors.
The homes.co.nz website even lists the rental estimates based on the runaway house prices. So up and up goes the price of houses month by month by month as homes.co.nz updates whole neighbourhoods market values and rental estimates accordingly.
It used to be that the updated market values were only done every three years with the calculation of new RVs - but now we can get that information in 'real time'.
Government needs to step in with regulation to slow this 'real time' (month by month) increase we are seeing.
Here's a great example. House recently purchased for rental purposes for $600K+ on a (2019) RV of $435K;
https://homes.co.nz/address/lower-hutt/stokes-valley/2-harold-grove/Yno…
According to my formula - maximum weekly rent would be $478.50/week.
But listed presently at $610/week;
https://www.trademe.co.nz/a/property/residential/rent/wellington/lower-…
According to the calculator tool below - to be in the 'safe' category for outgoings on rent - the family/person paying $610/week would need a household income of $160,000. To be in the 'standard' category, the household income would need to be $130,000.
https://www.calculate.co.nz/rent-affordability-calculator.php
The median income in the suburb is $34,600.
Rents are unaffordable - and as a taxpayer I'm getting tired of subsidising landlords.
so house prices do not become unaffordable.
Do not become? Problem is they already ARE unaffordable. What type of 'reset' do you envisage?
To become affordable (based on median wages here; the 3:1 formula), I think prices need to drop, say back to 2005/6 prices, and I don't see that happening without a credit crash due to global, systemic bank failure. Something that might happen, but then no one will be able to afford to accommodate themselves at that time, and all responsibility will pass to governments to house their populations.
Actually, in the event of such a systemic failure, RV/CVs in NZ would drop accordingly, and presto; rents drop with them. It's not only triage for the present, but for the potential future 'shock' as well.
Kate..
I think 3:1 price:income ratio is not based on any kind of underlying economic reality... Just a ratio plucked from the past.. (kinda like saying the home on the proverbial quarter acre should still be affordable )
Look at building cost inflation.. ( this has more to do with Monetary inflation, in my view ) https://i0.wp.com/greaterakl.wpengine.com/wp-content/uploads/2017/01/Au…
If anything.... Its incomes that need to rise. https://www.scoop.co.nz/stories/BU1911/S00116/pay-settlements-help-push…
Building cost inflation far outruns wage inflation....AND... like any growth function ( exponential )... the different growth rates become problematic as time goes by..
Most of the problems , in my view, has been a result of the inflation targeting policy framework.... The Reserve Banks fixation on CPI inflation with a complete disregard for asset price inflation. ie.. Most of our Land price inflation has been a function of population growth + Monetary inflation.
eg. in 2005 they allowed Money Supply to grow by between 10- 15% in 1 yr... So far this yr its screaming ahead at almost 10%
( compare the rate of money supply growth with building cost inflation and wage rate inflation.... and ponder the increasing gaps of these growth curves over the next 10 yrs.. ie... What are the implications if Monetary inflation keeps growing at these rates ?? )
I agree with Dale Smiths ideas in regards to the utility value of land.... making the per/unit cost of land as cheap as possible..
Its probably the best approach to making housing affordable..
ps.. reading a book called "Money in New Zealand" by W Rosenberg, written in 1973. He was fully cognizant of Monetary inflation and the impact it has on asset prices as well as consumer prices, and the larger impacts on society in regards to afforability ,poverty..etc . As an economist, I think he had a better understanding of things than most over specialised , academic, economists today..
in the book he has a chart showing a house price index that was 100 in 1955 and 220 in 1970... ( 120% price increase in 15 yrs )
population in 1955 was 2.1 million and in 1970 2.85 million
Housing affordability has been an issue for many yrs.... culminating now into a massive crisis...
I don't disagree with any of that - aside from the solution being to set land prices at the utility value of land, i.e., getting the cost of land as cheap as possible. How do we do that? Removing all planning restrictions, such as RUBs etc. just produces more sprawl and owner-developer set prices anyway - they'll always go for the smallest discount on values at the center.
What is needed is affordable housing close to work places. Hence the central/accessible land is already built on and land values at the center continue to increase.
We could blanketly change our land valuation methodology - going away from a market-based value as is the case now. But, would that affect retail prices? I doubt it.
Again, I can't think of anything aside from rent price controls to take the heat out of the market; to give FHB a chance to save for a deposit while renting; and FHB ready-to-buy now some relief from the competition on price from investors.
Hi Kate, and also in reply to Roelof.
The 3x median multiple is well-grounded inland economic reality. When I came back from Texas in 87, both Texas and NZ median multiple was 3x income and had been that way historically for about as far as you could go. Texas is still 3x, and NZ 6.5x and Auckland 10x. The reason was policy changes that restricted land supply if you had to give it a name - Compact City Ideology.
This brings us to your next point Kate - Sprawl. The compact city model forces prices up and people are actually forced to the fringe to find affordability or reduce their housing requirements to stay where they are or move closer in. The price of all land is set at the fringe from rural to exurban, suburban into the CBD. This lower on the fringe and increasing higher into the CBD is the same for ANY city in the world. What sets the relative price difference between cities is policy decisions that affect what price the fringe land can be bought for.
So if you want cheaper prices in the CBD, you first have to set the price for what you buy the rural land for on the fringe that has the potential to be used as housing. Note I said potential as it is the potential of what is an almost unlimited supply (in housing terms) that stops the ability to landbank and creating a monopoly restriction on availability. As soon as you do this then it is cheaper all the way back into the CBD and if that is where the market says they want to be, then developers will build there rather than on the fringe anyway.
This brings us to the last point on the next best economic use of land. What I mean by this, is if rural farming land is economically being farmed at $50,000 ha (dairy farm price) then if the farmer goes to sell it, that is the maximum it is worth. If they try to sell it for more, a purchaser would go and buy elsewhere as there is plenty of choices. Conversely, if they are offered less they won't sell. Without any restriction, that is all the land is worth - period, it does not matter what is the next use of land whether it is residential, commercial, or whatever. So in Texas, if a developer goes to buy land then he only has to pay the economic value of the land in its present form. If the owner doesn't want to sell, the developer just buys the neighbours that is for sale.
This is a true free-market - willing seller willing buyer. This way the seller and purchaser dictate what gets sold when, not the council which artificially restricts what and where development happens. If you look at the geographical shape and dispersion of Texas cities they identical to NZ cities ie denser CBD core and lower density moving to the fringe. The only real difference is houses in Texas cities are half the price and of better quality.
I have done the number on a real NZ budgeted subdivision and could easily reduce section price by half by removing these non-value-added restrictive costs if allowed.
Imagine this, cows grazing grass on rural land at $50,000 ha. Govt rezones the land, which due to restrictive zoning makes the land worth $2,000,000 ha, without adding any amenity value. Do we pay 40x as much now for our milk? Further, the owner walks away with $1,950,000 more per ha than its economic worth, on which he was making a great living. And now the developer has $1,950,000 less to either/and build more affordable housing, or put into better community amenities or give to the council for infrastructure.
And the last point is this, All savings flow to the most restrictive part of a system. This is just a simple supply/demand monopoly imbalance the restriction is given. The land is the most restrictive part, any saving a builder might make, within one build cycle, shows up in section price increases. same with Govt. incentives, lower interest rates etc.
It's a negative-sum game. Rent controls may work short term as some sort of triage to stabilise the patient. But life-saving surgery is needed.
Yes, I've heard all the evidence and the arguments for years and years and years - and I don't now and never have disagreed with the evidence.
Yet here we still are - so I've given up on that as any kind of solution (and besides I think it awful that families are having to go further and further out from their employment to find shelter).
You've got a lot of expertise and energy, Dale, and we need immediate solutions that relate to existing housing stock price rises, and the subsequent, pernicious rent rises. Have a look at the evidence I've presented by way of real-time investor purchases for buy-to-let and the astronomical rents being sought - totally and utterly unaffordable based on the 3:1 ration that you so rightly point out as empirically correct.
So, my thought is argue for triage as it is needed and needed NOW.
Agreed. Something needs to be done to stop this, while more mid to long-term reform is enacted and takes hold.
Rent control like you are suggesting might work.
For true long-term landlords, the rental control will mean very little as based on their original lower purchase price, they are returning a very good return on investment. It is only the newly purchased properties that should be negatively geared with rent control and then no opportunity to counter this with the standard capital growth.
But I know what will be going through all the pollie's minds and the RBNZ, is how do we do anything at the top of this wave without inadvertently triggering the opposite of what has happened? After all, they have mismanaged not only the last few decades but in particular, the last few months resulting in a huge price increase. And the likes of the world bank, currency markets etc. are watching and reacting. The reality is they don't have a clue.
So it's up to us. :-)
So regardless of how we got here, how do we get out of it - all of us. Maybe combinations or permutations of the following:
1. Rent control.
2. LVR's
3 DIR's
4. Land supply reform.
5. Council consenting and control reform.
And I would expect this to stall and then cause a fall in prices which affects certain people more IE those people that have purchased closest to the reset are the most disadvantaged, and to lesser degrees, others as the purchase timeline extends back. This also affects FHB as they could be caught with negative equity if prices fall even slightly which can trigger if they can even refinance when the time comes. Even if a small % of these default, then it could trigger bigger and badder things.And not only does it capture people's savings, including the possibility of KiwiSaver, but the parents that have provided equity/security that they will need for their coming requirement. It's a real house of cards.
But is it possible to ringfence those affected so the loss can be stabilized to the point it does not provide a tipping point for the rest of the economy, and while not rewarding these people for their behaviour does not punish them either, ie can we cap a price fall like we are trying to cap a price rise. It is all about stability after all.
Helen Clark Foundation thinks so.
https://helenclark.foundation/wp-content/uploads/2020/02/somewhere-to-li...
To quote: 'Refinancing: a progressive refinancing scheme could reduce household debt burdens for the primary home, to mitigate the risk of negative
equity resulting from changes to taxation and mortgage lending.'
What do you think?
Sure I agree with all of that, and first steps first. Probably needs someone like Andrea Black or AAAP to spearhead a rent control proposition. Then perhaps the MSM commentators will take it on as well. Unfortunately AAAP seem to be concentrating lobbying efforts on raising benefits levels as opposed to reducing costs-of-living.
As a nation we need a government that uses regulation (as opposed to tax) such that we (every New Zealander) can all live within our own means.
LVT would achieve all that you want it to Kate. https://en.wikipedia.org/wiki/Progress_and_Poverty
Agreed a possible longer-term consideration in a full revamp of our tax/welfare system.
But it would not have an immediate effect on rent prices (might even increase rent prices) and again, like tax deductibility of interest payments, for residential investors, similarly I would assume that any LVT would also be deductible. This further widens the price advantage that investors have over owner-occupiers.
LVT could though be implemented as a tax deduction for owner-occupiers as well. But again, it's a big picture type of re-vamp needed and those never come quickly.
Rent price relief at the lower quartile range needs addressing immediately. Otherwise, all taxpayers pay more in accommodation supplements as time goes on.
The Government.
Assuming private landlords put up their properties for sale at auction, the government need only provide a rule/regulation that it will only purchase such homes in the event there are no other bidders.
We need to prevent this from happening here if there is a similar market crash;
https://citymonitor.ai/economy/business/wall-street-now-america-s-bigge…
How about this article? https://www.brookings.edu/research/what-does-economic-evidence-tell-us-…
They say rent control does significantly more harm than good on balance of evidence. Some existing tenants will benefit, but owner-occupiers and new and young tenants will suffer greater than the gain of the renters who benefit from controlled rents.
I think in NZ, it may be more practical for the state to provide housing. But in absence of real empowering of the poor, what ever solution will be short term solution which will cause a whole new set of problems medium and long term.
Interesting article - really useful. Plenty to learn from it.
One of the biggest problems I see in the case studies/implementation of rent controls is the distinction made between "rent controlled" and "non-rent controlled" properties. I'd suggest to avoid those pitfalls in regulation, that all rented properties fall under the rent control regulation. By making this distinction in the US, landlords of existing "rent controlled" properties felt their profits were falling away in comparison to the market price - which was based on "non-rent controlled" properties.
To avoid this 'below market price' rental price scenario - my suggestion is to base rent controls on RV/CV (house and land valuations) which are updated every three years. In the years between CPI can be used to calculate maximum rental price increases.
For around 20 years now, I've seen FHBs competing unsuccessfully with rental investors on price. Putting in a rental price control based on RV would significantly balance that playing field - and likely slow house price growth as well. Hence when the 3-yearly market price review of rents comes up - hopefully the rent increases wouldn't be too painful.
It's quite obvious that if we continue to allow house prices to rise - rents will rise with them. And to my mind, high rents really hurt FHBs as well. If rents were affordable, then home buyer aspirants could save deposits far more easily.
Plus the government could wean renters off the accommodation supplement. That is a huge issue for the government as even though billions are paid out, and thresholds end up being reviewed time and time again, rents are still unaffordable for many.
Had Kiwibuild been successful it would have bought some time, but unless the financial distortions in the tax system are fixed the problem will continue to rear it's head again and again. I feel like it's time for the productive side of the economy to be given some love at the expense of the non-productive.
This is just a start.
We need a concerted and urgent action by the Government and Reserve Bank, which would include:
- heavily tax all forms of speculative housing, with no exception
- introduce LVR of at least 50% for speculators, ideally 75%
- slightly but progressively increase interest rates; and no ridiculous ideas about negative rates
- reduce reserve bank funding, and target only to the real economy, not to speculative housing
- remove landlord welfare
Sounds like property investors who ask the authorities to punish savers because they have actual money they've probably worked for in the productive economy and pay tax on that, so that they (landlords) can pay no taxes using debt that a bank has made out of thin air. Just saying.
Exactly right. How much public frustration must be expressed by the majority of hard-working Kiwis , and how much damage to the economy and to the NZ financial system must be done by these stupid policies (already failed in Europe and in Japan) of ultra-loose monetary settings, before something is done ?
How long do we have to wait until the tax regime is balanced in favour of productive investment, rather than parasitic housing speculation ? How long do we have to keep witnessing a RBNZ and a Government supporting a parasitical minority of landlords at the expenses of everybody else ?
Having read a few books by the likes of Shiller, Taleb, Dalio, Akerlof, Kahneman and other bubble/busts around the world - you read it and think 'surely people, central banks and governments, can't have been that shallow and stupid to let something like that happen'.
But here with are, with everyone pointing their finger at the other, blaming them for where we find ourselves - so now I understand....
Are you proposing we lock in today's debt commitments and crash the value of the equity it underpins?
I'm not against house prices falling, but owner occupiers need a softer landing than investors, especially given this would catch a cohort of recent FHBs. Targeted assistance shouldn't be too hard to aim at this subset of owners at the very least.
Someone who bought this time last year with a deposit of 20% could see a 20% drop in house prices tomorrow and still have nearly 10% equity. A drop isn't as big a problem as some people think.
I could afford a 50% drop in values and still have 60% equity, and I only bought 7 years ago.
Any regulation will fail and will result in increase of house prices or destruction of construction industry. When Government is trying to regulate price of food then food is disappearing from shelves of supermarkets or quality of food decrease dramatically. Same will be with houses.
There is elephant in the room and it is low rates. You can borrow below 2% and official inflation run for 2% or more. It is free money. Personally, if I can, I would borrow as much as possible NZD and exchange to USD. When NZD will fall dramatically (it is keeping artificially high) it will be surplus of money. No one in right mind will invest money in business during Covid-19.
Well, well well, a very interesting letter from Robertson, I can't wait for Orr's reply. Since Robertson states that he is open to suggestions to control house prices Orr could certainly come back by saying "can we have a DTI" for example. He could also ask for other tools… or make the FLP housing exclusive
This is an extremely interesting move from Robertson (good on him) and it could lead to little more than political noise or the bomb that could change Real Estate in NZ
It ain't ever coming down. If it even looked like there was a slight chance they would open the immigration floodgates. The only tool he has is the LVR. It would be years in government to try and get legislation that differentiated interest rates between investors and FHbs, or created a maximum number of houses per person. Even then the picture is slow blurred with trusts and company ownership, ownership in couple they are never going that route. LVRs... of limited use to someone who has 50 houses and the market has just gone up 20%. they have a whole lot more buying power. Covid was the opportunity.. have a crash, blame the pandemic and then come in behind with legislation. But no.. they raid taxpayers pockets for 128 billion to give to property investors for free to keep up.... It is the golden goose...
It does include housing as it includes rent. Likewise it probably does include sheep in the form of meat but not in the form of farm prices.
But realistically the only inflation that they need a minimum for is asset price inflation. If we had asset price deflation people won't invest in assets and the economy will go backwards, but CPI deflation will have little effect as people will still buy food and petrol and TVs and shoes.
I suggest they have two targets: a maximum CPI target (to avoid hyper inflation) and an asset price inflation range (to avoid deflation and asset bubbles). The current settings are too simplistic; they used to be fine when they were always battling inflation but not any more.
Awakening by our FM !!!!!!!
Happy Realization !!!!!!!! After screwing the average Kiwi and FHB. As it is before lockdown house prices were high and consuidered to be in bubble and now from their another 20% jump (offically) to 50% jump (Actually) and now you wake up Mr Robertson ( cannot swear though would love to do so for killing even the dream of owning a home in Auckland)
Now the smart paint says...not doing but thinking......
'I am also concerned about the potential that these price increases may present a financial stability risk to the economy, particularly when monetary policy returns to more normal settings.
"Housing price instability is harmful to our aims of reduced inequality and poverty, and is also likely to negatively impact the Government’s aim of creating a more productive and inclusive economy."
Their was an auction on our street and literally saw a lady crying and husband trying to comfort her and that house with CV of 9400000 was suppose to go for 1.1 million to max 1.2 million ( and the lady when chatting earlier mentioned that she is fed up and for this auction prepared uptill mid 1.2 million and when she was was outmoded at 1.26 million was literally crying. At the same time an Asian person who was bidding earlier asked the auctioner when you reach selling now, let me know and bought for 1.35 million nd am sure could have easily gone up). Street where median house price were in 900s should have been in one million bracket or 1.1 million but have now suddenly shot to 1.5 million.
One has to visit Auction, to see the craziness and the very next day the door knocked my house with so called good news that she could try for 1.4 million for my house that has a CV of 960000. Iris price could have been in 2026 or 2030 but in few months....wow.
So Robertson has discounted every single potential fiscal measure and thrown it over to Orr, the architect of the problem.
What a fiasco.
Given the ONLY thing keeping the NZ economy ticking over is the rise in residential house prices and the resulting development boom how the hell is Orr supposed to address rising house prices without crippling the economy ?
It's more than a 1/4 acre in Terrace Housing/Apartment zone.
Good for 10 terraced houses, or 30 apartments if they went small/medium sized and pushed it hard.
At those rates, probably a decent investment, and of all the silly prices paid, I'm glad to see that one, as it's clearly a developer who will use be using Unitary plan rules to their potential, which is one of the few things that may help us dig up from this spot.
Sadly, I think Orr and his Cronies view current house price inflation as 'necessary' (they've said that a number of times already this year).
You know... the 'wealth effect'. Gift wealth to the 'haves'. Because they feel 'wealthier', they might spend their unearned wealth on goods and services that the 'have nots' produce. The 'have nots' can then make a small margin on their goods / services, and can put that towards an increasingly unachievable house deposit (after deducting the increase in the price of general goods / rent). Such a great idea with plenty of empirical evidence to support it!
My god, what a fiasco. We were all calling on GR to do something to rein in the ridiculousness. It should have come in the form of having a specific target and giving the RB more tools with the target - e.g. a DTI tool stating something like "in major centres X% of mortages cannot be >5 x income" or similar.
Instead he wrote to Orr and said he wants to add in a clause to "avoid necessary instability". WTF does that even mean? How the hell do they measure that? What is "necessary" and what is "unnecessary"??? Define instability?
A nail was rising up from the floor, threatening to destabilise the floor. GR stood over it, with a selection of really nice hammers to knock it back in, sitting right in front of him. He reached out, choosing what he thought was the best tool for the job. The cheese grater was destroyed, the nail bent and twisted and the floor still destabilised.
You couldn't make this shit up.
They are just going to lock in the extreme prices. The remit will now simply mean they can never fall back to earth. Housenpl prices will be stable and high. Forever.
Degenerate clowns are still running the show. They are going to ensure its all buggered for a long time to come.
Yes thats a concern eh. As Kate mentioned its just 'baked in' all the QE now into the price of a house - which will become a debt obligation for all new buyers for the next 30 years - reducing their ability to spend in the productive economy - reducing GDP - reducing wage growth - reducing the quality of lifestyle.
The government (labour and National) has been letting a net migration of 50-60k migrants pa into NZ for the last 5 or 6 years. Then it writes to the Reserve bank saying it is concerned about the price of houses. At least Robertson is finally acknowledging that house prices is an issue. Previously Adern had said interest rates were not her problem and Orr said house prices were not his problem. So something positive in it I suppose.
Have you looked at M3?
https://www.interest.co.nz/charts/credit/money-supply
It's been growing at well over 5% for nearly every period over the last 30 years! Hence house price rises....
This is where our inflation is - its in our assets. So monetary supply is expanding, but it isn't ending up in consumption price levels, its ending up in assets, but we don't measure that and wonder where the inflation is....so we drop the OCR further.....the M3 expands and asset prices rise, but the CPI doesn't.....so we drop the OCR to try and find some inflation...repeat until you find us here today.
When you unable to do things?.. shifted to the team to deal with, so distributed the blame, delay etc. cool aid.
JA just uttering concern, GR can only put the word unnecessary instability (what the heck is that?) - Honestly, we don't need any sort of 'control' mechanism here, we still have to maintain the good run, it's clear we can detect some sort of jealousy initiated by JA (as she only has one of those 2mill) - C'mon JA your mortgage probably already be cleared by now, instead of envy.. why not buy some more rental investment? - ease, your own pressure by introducing the removal of the bright line test. You'll be rewarded, follow the rest, don't listened to those claimed to be economic expert, but actually a looser. We don't want a looser PM to lead NZ here.
Next they'll be asking the RBNZ to consider child poverty, inequality and homelessness. And then they're basically becoming the government. Solving problems the government should be solving.
I think the whole system is broken. The RBNZ should not be separate from government at all, they should be working together to solve problems, not going "Oh that's not our job" or "We can't do anything about that".
We welcome your comments below. If you are not already registered, please register to comment.
Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.