The Reserve Bank's next interest rate review on August 18 SHOULD NOT have been all about houses. But it was probably going to be.
And while it will still be surprising if New Zealand's Number 1 Obsession doesn't get referenced in both the upcoming Monetary Policy Statement (MPS) and accompanying media conference, the fact is the RBNZ has taken some heat off itself by unloading some goodies from its 'macro-prudential toolkit' against the housing juggernaut 15 days ahead of the MPS release.
I will say this one more time, because it probably always bears saying: Interest rates are a monetary policy issue, while housing is a financial stability issue. Yes, they are separate. The RBNZ often struggles to be able to make that differentiation with people. Additionally there is the errant idea out there that the RBNZ aims to bring house prices down. Not its job.
Okay, but rising house prices do bother the RBNZ a lot if they are driving people to make risky looking decisions and gearing themselves up to the gills with debt. Er, which as it happens, would be about where we are now. That's a financial stability risk, you see.
However...
After everything I've just said, when push comes to shove, nothing will do a finer job of directing a jet of ice cold water into the midships area of the housing market than a dose of rising interest rates. For example, the RBNZ cites the success of the original introduction of the loan to value ratio (LVR) limits in late 2013 with taking steam out of the market then.
Hikes DO work
Hindsight I think would suggest the FOUR erroneous (and later reversed) interest rate hikes made by the RBNZ in early and mid-2014 might have had more than a little to do with it. Yes, that's right, the chief monetary policy weapon is not half bad when aimed at financial stability problems either - in certain circumstances.
And, undoubtedly, we are in those 'certain circumstances' at the moment.
The RBNZ dropped the Official Cash Rate to an emergency level of 0.25% in March 2020 as Covid started to really bite. And these abnormally low interest rates have poured petrol on the housing market.
The 'financial stability' heavy artillery was brought out. The LVRs, removed last year, came back in and 40% deposits for investors were reinstated. The Government had a go, with its March package including the seemingly nuclear option of removing interest deductibility for tax purposes for investors.
"Is that all you've got?" The housing market said, before proceeding on its merry, rampant, way.
The RBNZ had forecast that for the September quarter - IE the one we are in - house price inflation would be just 0.2%. Ain't going to happen. Things still seem to be roaring along at around +30% annual pace.
Decisions, decisions...
So, there we were going to be, come the August 18 RBNZ decision time and it was all going to be a bit murky, to say the least.
Major bank economists have already decided, on the back of strong economic data, such as the scorching June inflation figures, that the RBNZ will raise the OCR on August 18.
Support us AND go ad-free! Find out how.
But it's not as straight forward as the economists would have us believe. If we hike we would be a world leader in raising rates. Australia is not talking about rate rises till 2024. We would be going alone. Now, I'm sure that wouldn't necessarily stop the RBNZ moving now, but it would be a brave call. And remember, we are just one super-infectious, super-spreader away from another Covid lockdown. And that would be an instant game changer as has been seen in Australia.
I don't think right now that the RBNZ has decided to hike rates this month. It will feel the pressure. It won't want to start a rates hiking cycle and then reverse it - as it might have to do if things go against us globally, or if we do have the dreaded new Covid outbreak.
We are a tiny country and we can't pretend we can operate in isolation. Even if we feel pretty isolated at the moment.
The labour market figures out on Wednesday (August 4) are hugely important. If it looks as though we really are close to full employment, and if there's emerging wage increase pressure, this will provide a further twin push towards a rate rise.
Then, as I keep stressing, don't forget about the RBNZ's own Survey of Expectations out on August 12. It pays a lot of attention to this. The last of these surveys, out in May, had an expectation of two-year-out inflation of 2.05% - just above the 2% level the RBNZ explicitly targets. If this time around that two-year figure has jumped well above 2% (and I suspect it will have) then that's possibly the final push for the RBNZ.
Wait and see?
But, still, the RBNZ might, under all the circumstance want to wait just a little bit longer anyway, given the choice.
Which is where I think the central bank has been savvy by getting these macro-prudential measures under way against the housing market this week.
There's two parts to that.
First, if it DOES decide to hike rates it can say it has done so clearly based on inflationary pressures it sees - NOT to dampen the housing market per se.
Second, if the decision is to hold fire this month, the bank can ward off any criticism coming its way about the housing market by pointing to the fresh LVR and debt-to-income moves.
In other words it just makes life a little less complicated. A little. But goodness me, it is complicated enough.
33 Comments
The RB can wait until October to bring in its extra tools. Then it can wait another 3 months to see if the tools have had an effect. Then the water will be muddied by the summer frenzy so it won't be able to see clearly until March next year. Meanwhile houses are appreciating at 2% per month. Not a bad return. Hold a $900k house for 1 month and flick using a private sale, and even after lawyers fees and brightline tax you'd still be looking at about a $10k return.
Investor in a forum:
Reserved a ‘yet to be completed build’ for $52k
8 months later settled and immediately sold it for $212k profit.
Even paying tax on it gets close to $130k in hand without making any effort.
Has gone and secured another new build with deposit and plans to do the same. Encouraging fellow investors to follow suit. Made me sick to my stomach.
Yeah, I'm starting to get the feeling that the central banks will keep rates down and just let inflation rip while dithering and mumbling about thinking about looking at it if it gets much worse.
Matches the historical pattern Mark Moss has found - they always choose to destroy the currency.
Then they give us "new" currency (CBDCs), and debase them. Wealth transfer and delusion, as resources run thin.
I'm growing veggies.
But it would probably lock out the very people they are claiming to help.
They would be better to exclude FHB from these rules, but then rising interest rates would actually make financial instability worse than if investors were the purchasers.
Rock and a Hard place, while being pushed by a government who don't get any of this
The OCR needs to increase this month so that housing prices can reduce to more affordable levels.
The price of houses would have been so much more affordable if the government hadn’t tinkered with the Reserve Bank’s mandate to include “maximum sustainable employment” when setting the Official Cash Rate.
This change has mean’t that interest rates are now much lower than they would otherwise been & as a result NZ now has unaffordable housing. This problem is now very unlikely to be fixed for a least a decade & will deprive an unacceptable number of Kiwis the right to have adequate housing.
Affordability is a combination of cost and serviceability.
Serviceability is about the same as a few years back when interest rates were higher but house prices were lower. Lift OCR now, and affordability might become worse as people won't sell when the price drops, kiwis just tend to hang on until the next price spike
"....people won't sell when the price drops".
The problem I have with this argument is that it implies that the only motivation for selling a home it has increased in price. What about people who move for employment reasons, or who are over leveraged and need cash?
"The Reserve Bank's announcement of new more punitive measures against the housing market takes some pressure off it to be the first cab off the rank in terms of hiking interest rates"
David, this is the only reason that Mr Orr has spoken today not because he wants to control the crisis but because he so does not want to raise OCR.
Only as had OCR gun against his head, he announced but again will be more of a lip service like :
LVR headline is BS as will only decrease high risk lending to FHB below 20% TO 10%
AND
DTI will start discussion after a month and will continue for weeks / months than will again have discussion for weeks and months than if decide will do it with grace time of another months or year.
Net result = ZERO as far controlling the ever growing house price on weekly basis, now.
You can save this comment and hold, if it is not so.How come experts fall for all this crap and do not highlight when having one to one with errORR.
The macro tools will take some of the edge off this hiking cycle, but they're not going to be implemented or bite in the next few months.
The RBNZ will definitely go in August, macro tools will just give them that breathing space in Q1 to wait and see after the first couple of hikes.
Meanwhile, to suggest that NZ can't hike rates yet because noone else has, is the most inane argument ever. It's also not true as there have been a selection of mainly emerging market CB tightenings that started a few months ago. Different countries can be experiencing different macroeconomic conditions that warrant different policy settings, nothing controversial about that.
David may be correct in differentiating between the RBNZ's responsibilities and those which are not supposed to be, but if I understand it correctly the RBNZ is required to 'supervise' the trading banks? Therefore when the trading banks behaviour creates financial stability risks then the RBNZ is accountable is it not? The problem is that by fiddling with interest rates, the RBNZ is not adequately supervising the trading banks, as they have very firmly demonstrated that their self-interest is the only motivator they follow. Perhaps the RBNZ should be more proactive in carrying out its supervisory functions?
The choice is simple: raise interest rates now, and significantly, in order to try and preserve the financial stability of NZ and head off higher inflation, or let the situation get out of control and be forced to raise rates at a higher level later on. No excuses, more or less self-serving, can hide this simple truth.
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.