The Reserve Bank (RBNZ) concedes its house price forecasts have consistently undershot reality over the past decade, thanks to immigration levels being higher, and interest rates lower than expected.
“Since 2010, on average our forecasts for annual house price inflation one year in the future have been out by 5.2 percentage points (‘mean absolute deviation’),” the RBNZ said in a report prepared for Parliament’s Finance Expenditure Committee.
“Excluding the COVID-19 period, the same metric is 3.9 percentage points.
“Over the past decade, the key drivers of this deviation have been that migration has tended to turn out higher than forecast, and mortgage interest rates have tended to be lower than our forecasts would imply.
“Both these factors have contributed to house price inflation tending to turn out higher than anticipated over this period.”
The RBNZ provided this written commentary after the Labour members of the Finance Expenditure Committee blocked a request by Green MP Chlöe Swarbrick, supported by National and ACT, for the RBNZ and Treasury to appear before the Committee to discuss how they derive their house price forecasts.
The issue is salient, as house prices completely overshot expectations during 2020, and look to do the same in 2021.
The RBNZ, in its latest Monetary Policy Statement released in May, forecast the CoreLogic House Price Index increasing by 5.5% in the three months to June.
However, the index actually rose by 7.2% in this time. It then rose by 5.9% in the three months to July.
The RBNZ projects house price growth falling right off to 0.2% in the three months to September, 0.1% in the three months to December and then 0% in the next two quarters.
The RBNZ explained in its report for the Committee: “Our May projections were for a significant slowdown in house price growth over the course of 2021, followed by a period of modest growth.
“This forecast rests on assumptions that high construction activity and weaker population growth would result in a gradual alleviation of supply shortages, and that the Official Cash Rate would be gradually increased from the latter-half of 2022.
“It was also assumed that the re-imposition of loan-to-value restrictions and changes to the tax deductibility of interest would reduce house price growth in the near-term.
“In the long-term, house price growth is assumed to converge to around the rate of nominal GDP growth.”
The RBNZ said that in June, it, Treasury, and the Ministry of Housing and Urban Development established a technical working group to share data and analysis around the assessment of “housing sustainability”, and to compare forecasting methodologies and economic modelling.
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While the RBNZ’s job isn’t to control house prices, house prices materially affect how it sets monetary policy (interest rates) and maintains financial stability (by using loan-to-value ratio restrictions for example).
National MP Nicola Willis stressed this point, noting there were real-life implications associated with the RBNZ getting its forecasts wrong.
Swarbrick said it was important for the RBNZ to brief the Committee on its forecasts in person to highlight and explain how it believed its policies were affecting matters such as housing affordability, which the Government is responsible for.
She was sceptical that despite warning Finance Minister Grant Robertson in early 2020 that the use of unconventional monetary policy (like quantitative easing) could boost asset prices and exacerbate inequality, the RBNZ didn’t at least consider a scenario in which house prices would skyrocket.
The RBNZ and Treasury weren't alone in underestimating house price growth in 2020. Most economists - towards the start of the pandemic at least - had equally pessimistic views of the impact COVID-19 would have on the housing market, despite astronomic amounts of monetary and fiscal stimulus being deployed.
99 Comments
Really - I'm shocked.
Actually I'm not and worse still they have created what could be described as inter-generational thievery. Robbing young families of their savings, health and work life balance as they try to repay huge debts.
the RBNZ have completely misused the monetary policy system.
Ikimpaul... Excellent comment.
But this is legal and have no accountibality so get away.
No one to raise finger at the instiitution - RBNZ but forgets that critsizing or accusing is not of the institution but the people who are currently running it. No accountibality.
The fact that we (the people who work hard for their salaries) have been screaming and he just went “least regrets” (aka I don’t care that the great big proportion of households suffer while a select few rejoice) shows he is not fit to paid by the sufferers.
Let him get paid by the tax paid by the select few that he is protecting. Oh wait, it’s peanuts.
This is what you get when any government agency is all authority and no responsibility. Our public service is opinionated, self serving and unaccountable. They are the untouchables. They, the hierarchy that is, are as such a threat to our society and democracy itself. “Oops, sorry we got it wrong.” But who suffers? Not them, not any of them. For them life’s good, self preservation enshrined. It sucks, it totally sucks.
ps.Mostly I am hardly a fan of the Greens, but good on you Chloe, sticking to your guns on this one.
Not for getting the the famous banker John Key started all this.
Homes were good value from 2008 to 2011.
Very good 4 Bedroom weatherboard family homes on Aucklands Northshore Westlake school zone $550k.
This is all a result of his doing and his mates at NZRB.
Thats were the buck stops.
I’m certainly no fan of Key, but this madness really got started under Helen Clark. The GFC helped control prices at the beginning of Keys term, then they started rocketing up again towards the end. Team red is just as bad as team blue.
https://www.rbnz.govt.nz/statistics/key-graphs/key-graph-house-price-va…
Labour and Helen Clark certainly set the stage, but Key and National are the ones that ran the production. Rockstar economy, remember that?Borrowing to give people tax cuts, meanwhile having to rebuild a city, so they couldn't invest in infrastructure to accommodate all of the immigrants they turned the tap on for?
Now that lack of infrastructure coupled with high immigration is biting us in the ass.
Yes they are incompetent, but your counter reason is not correct.
In jurisdictions where there is also an oversupply of credit, house prices are very affordable because they allow supply to equal demand due to good land-use policies that remove restrictions.
We have a chronic supply shortage of affordable land due to land-use restrictions.
The ease of credit has no effect on prices when supply can equal demand.
To be fair, the RBNZ doesn't control immigration policy, land use policy or tax policy.
A system where the blunt tool of interest rates is used to try and keep inflation (as measured by a crock of a CPI) in a narrow band, while Nat-bour run one of the most aggressive per capita immigration policies in the developed world, restrict land use and have a religious aversion to broadening the tax base, is destined to fail.
Exactly. I don't believe its in RBNZ brief to forecast house prices. Its not part of monetary policy but could be said to affect financial stability as a consequence of govt fiscal policy (immigation amongst others). The RBNZ have adversely managed financial stability by not using the tools available to them, DTI and LVR, soon enough. Grant Robertson has also been reticent by not using sufficiently strong remits and/or order in council to steer RBNZ earlier on in a conservative financial direction. The RBNZ independence is trotted out by both National, Labour and MSM when convenient.
GR is happy for the RBNZ to be seen as the cause of all the housing problems.
Well said. It is the financial stability aspect of the RBNZ's remit that they have failed at most spectacularly.
They seem to think financial stability is ensuring the ponzi doesn't get exposed during their tenure, and to do everything possible to keep in going. When they should have been ensuring is that the financial bubble didn't form in the first place.
I assume you weren’t one of the 99% of commentators on here predicting a house price crash last year when Covid hit? The RBNZ would have been laughed at had they predicted what did actually happen.
If there were people that could reliably predict markets (especially in the current scenario) they would be stupid to be working instead of speculating (well I guess it would be called investing if you knew the outcome!)
Well said - the RBNZ, with their completely reckless, unnecessary and incompetent ultra-loose monetary policy and dangerously low interest rates, have directly created an almighty financial, economic and monetary dog's breakfast with:
- high risk of inflation and of stagflation
- systematic destruction of savings and disruption of the process of capital formation for investment into the real economy
- complete mis-pricing of risk and destruction of a meaningful bond market
- gross and unsustainable inflation of the housing Ponzi and resulting potential instability of the whole financial system
- devaluation of the monetary base
- explosion of debt levels and unbalancing of the whole economy away from productive activities and into parasitic, unproductive housing speculation
- gross increase in economic inequalities
And the list is not complete. Orr must go immediately and somebody competent must replace him, in order to urgently normalize interest rates and the whole monetary stance before it's too late.
Note that every economist in the country also thought this. And there would have been one... had the RBNZ not decided to throw caution to the wind and throw the kitchen sink (remove LVRs), the bath tub (FLP) and the car (LSAP) at the situation and do aim all of those at completely the wrong place (the banks, who they already knew would simply increase lending to the residential real estate market and f#$k businesses).
What they should have done is come in with helicopter money to all, particularly those on the poorer side. Instead they bailed out asset owners and dramatically increased bank funding, so we had a mass wealth transfer to those already with property, which was completely predictable given what we already knew about bank lending.
I seriously don't believe they could have screwed it up more if they had tried.
And I am not an economics 'expert'.
As I said, it's a challenging thing to do, and markets can be volatile.
But even without volatility they have got it consistently wrong.
Plus, as a party that strongly influences the market through its actions, it should have a much better chance of being more accurate.
Don't you think?
I'm assuming that the model used would have some basic relationships. Some which may not be linear. With weightings attached. With a whole raft of assumptions which effectively explain these relationships and weightings. Including weightings of zero for all the potential relationships which are not included in the calculation.
Someone. Anyone. (Intelligent preferably). Should have a role which is to adjust the calculation. Including bringing in new relationships if deemed necessary.
To persist with a wrong calculation must mean that nobody does this.
It could be that a focus on diversity/ inclusion/ gender diversity/ black lives matter/ women being better than men, anti Trump/ anti Boris/ anti Putin etc etc have a higher institutional priority.
No offence but the science that I suppose you’re referring too (I welcome the opportunity to read specifics) generally talks about cognitive diversity which people often confuse with ethnical or gender diversity.
I have no issues with latter - I personally hired & employ a numerous people of different ethnicities/genders. Just pointing out that a group of people of same gender & ethnicity can be much greater diversified vs group of one gender & ethnicity for the specific job function they do.
This. The research constantly talks about group think and its undesirability, hence the need for diversity. Show me a bunch of old white men who think the same and I'll show you another group of old white men who have wildly different views. Marco Rubio and Ben Carson thought quite similarly.
In any profession if you can't do your job right for which you are hired, you get either sacked or if you have any self respect you will resign.
But this is not going to happen with this failed lot, even after knowing they had done blunders, they are not ready correct it or accept it. I haven't personally seen this kind of Incompetence and shamelessness any where. Shame and disgrace are small words..
I listed the main roles of the RBNZ which have all been achieved to a high standard considering the conditions. Containing and predicting house prices is not part of their mandate, if they got that bit wrong its hardly incompetence. I think too many people are criticising Orr and co without understanding the role of the RBNZ.
If house prices aren't their mandate, why the rush to remove LVR's last year when they predicted that house prices would fall?
It appears house prices are their mandate if prices are predicted to fall, but not their mandate if prices rise (and dangerously like this last year).
and they stay employed how ??? nothing in the immigration figures that was shocking pre covid -- they were pretty much high and stayed constant -- and the bank sets the interest rates -- so that is not a shock -- surely they could have been more creative in explaining their incompetence than blaming something they controlled
All western economies have suffered the same fate with the same central bank model of regulation and monetary policy.
Time to take back central bank independence and put it in the hands of government. Then we can at least exercise voting control of monetary policy matters. I am compelled to repeat this quote:
Here’s the thing. Despite over a decade of deranged Federal Reserve policy – I use that word intentionally to mean both “wildly outside of the historical range” and “bat$%!# crazy” – bank loan growth has been utterly unremarkable. So the growth we’ve seen in bank deposits primarily reflects the fact that the Fed has replaced trillions of dollars of Treasury bills with base money. That’s really the crowning accomplishment of QE – creating a massive pool of zero-interest hot potatoes that someone has to hold at every moment in time, and that does virtually nothing but destabilize the financial system with yield-seeking speculation. The chart below shows 5-year commercial bank loan growth.
Policy makers sometimes flatter themselves with the idea that holding interest rates at untenably low levels makes it cheaper for borrowers to obtain funds. Unfortunately, it does so only by transferring income from people who are trying to save for the future. Replacing Treasury securities with base money may make savings more “liquid,” but it doesn’t suddenly make people abandon their retirement plans in favor of consuming today. Low rates also don’t magically create productive investment opportunities.
What economic activities suddenly become viable at zero interest rates that were somehow not viable before? Only projects so unproductive that any positive hurdle rate would sink them. The main activities that are encouraged by zero interest rates are activities where interest is the primary cost of doing business: leveraged real estate transactions; “carry trades” that employ enormous amounts of leverage to profit from small yield differences; and speculation on margin. Presently, margin debt as a percentage of GDP is at a historic extreme.
https://www.hussmanfunds.com/comment/mc210614/
I don't even want monetary policy - the guys at the top can't be trusted with it. Abolish the central banks and let the market find a price for the money already in circulation. We don't need them manipulating this price, and we certainly don't need their forecasts.
Surprise surprise, the RBNZ is hopeless at measuring. And the consequences of being hopeless? Nothing.
In saying that, low immigration numbers, building the most houses we have in a long time, questionable shortage of supply all combined with new tools coming online... we might be in for a decent sized or enormous pop.
Ask that .....had the shortage came out of blue last year for house price to shoot as much as 100% in a year.
In crisis was need to protect existing house owner not support and promote speculation by removing LVR specially when interest rates were been dropped to zero.
Was he not aware, what would happen by removing LVR l, if not than why introduce and say will control speculative demand - it indicates if you know that by introducing LVR will contain demand than you knew that by removing will boost demand specially speculative.
"RBNZ admits to underestimating house price inflation over the past decade
Reserve Bank concedes its annual house price growth forecasts have been off by an average of 5.2 percentage points over the past decade"
Hi Jenee,
1 : It took Mr Orr's 10 years to realise.
2 : Were wrong 5.2% but since last year had predicted appox 10% to 15% fall to justify their least regret policy and was up by 30% - SO WERE WRONG BY 40% TO 45%
3: Even in May were they ignorant and the reason they went with WAIT AND WATCH Policy.
4 : House prices were going up on weekly/ monthly basis since last year so what changed in last few months for this realisation.
5 : NOW WITH REALISATION ARE THEY PREPARED TO GO WITH LEAST REGRET POLICY OR STILL WAIT AND WATCH.
6: Will they take personal responsibility and apologise to FHB those who manged to buy house by borrowing in extreme under FOMO and to many Kiwis for killing their aspiration and dream of providing a decent house to their family .
QUESTION : Will they still continue with their attitude of supporting and promoting speculation or take real meaningful action.
Highlight: A house bought in March ( when house price was at peak as experts) for 1.15 million sold recently for 1.565 million and in condition as bought .......This is the current housing situation in NZ courtey RBNZ.
Mr Orr realisation is good and begging forgiveness will...........sin.
A 10 year 5% odd error record and you only refer to the last year under the current governor?
It would be interesting to see if this prediction error has been around for longer than the last ten years.
And then there is Treasury and the bank economists and their predictions/forecasts/knee jerk guesses.
“Over the past decade, the key drivers of this deviation have been that migration has tended to turn out higher than forecast, and mortgage interest rates have tended to be lower than our forecasts would imply"
Ok, I get that the RBNZ had no control over the non-sensical immigration policy during the last decade but to say they were surprised by lower mortgage interest rates! WTF they set these things with OCR. They are the CENTRAL bank. How dumb do they think we are? What a farce.
'Ok, I get that the RBNZ had no control over the non-sensical immigration policy during the last decade....'
Not an excuse for if they knew that immigration is playing havoc with house price, how hard was it for them to put measures and policies to counter it just like doctors when they give strong antibiotic and are aware that antibiotic may have side effect, they give addidtional supplement medicine to mitigate that side effect.
If they are admitting can understand how BIG the problem is as they are not able to manipulate and cover.
Shame Mr Orr, should resign as under your tenure it went from bad to worse and you kept denying despite all data's suggesting otherwise.
Will wait to see what you do now or will it be just a band aid solution.
First of all they haven't accepted that they are at fault and they will never.
Second there is No chance at all, you are betting on blind horse without Jockey (Govt) who can run but don't know (arrogant and dumb head) in which direction.
This market will take another leap of 15% in summer..
"The RBNZ provided this written commentary after the Labour members of the Finance Expenditure Committee blocked a request by Green MP Chlöe Swarbrick, supported by National and ACT, for the RBNZ and Treasury to appear before the Committee to discuss how they derive their house price forecasts."
Jacinda Arden led Labour is guilty otherwise why would they stop .......Culprits.
I get the feeling that there is so much out of wack in our economy that it is on the cusp of collapsing into instability. Wild and uncontrollable economic and social lurches from one extreme to the other. I would not be surprised if we see a god almighty crash sometime within the next 6 months.
It is all very well to blame the RB, but successive governments have studiously avoided taking responsibility for many very fundamental flaws in the country and been very happy to hide behind the RB. The RB can only do a very limited amount and whether directly or indirectly government is ultimately responsible.
When the RB CPI/OCR model was set up we were struggling to control run away inflation and it was a logical and effective tool at higher inflation rates. The government also took a lot of responsibility and changed a lot of things. Since then the government has taken very little responsibility and hidden behind the RB. The CPI/OCR has remained untouched and over time the world has drifted into low to very low inflation zones. One of the few changes that they did make to the RB controls was to strongly reduce the influence of house prices in the CPI measurement. (why and what were they trying to achieve? what happened and was that was what they were after) The RB control model of lowering interest rates at the low end of the CPI control band has been totally ineffective at stimulating ours or any body else's economy, and we have been witnessing this even before the 2008 crash and certainly since. All that has happened is that it has stoked successive asset bubbles. They just assumed that it would work at the low end of the CPI range because it seemed to work at the top end. That was purely an assumption. Bad enough, but they never learned or altered it when it clearly did not (or did it suit them). Who's fault is that - Government.
On reflection, having criticized the RB control model at low inflation rates and saying it was OK at the upper end, I have to say that even at the upper end it often does not work. One of the consequences of increasing interest rates is that our currency can appreciate far too much. There was a period in the Clark and Key governments when our currency swung between US 45 to 88 cents to our dollar. the Japanese "housewives" we borrowing money at very low rates and depositing them in NZ, inflating our currency in the process. How do you run an export dependent economy under those circumstances. That and absolutely incompetent management is how we lost F P appliances.
I think that the whole RB regime needs a complete overhaul.
Government is run by politicians not leaders and .........less said the better about the breed called politicians.
Mr Orr cannot be given a clean chit, he knew otherwise does not deserve to be in RBNZ and should resign.
Moment they realize that housing ponzi was touching new height should have acted with same speed that Mr Orr had shown in April with least regret.
Mr Orr is guilty....can he sleep at night with clear conscious ...doubt or may be as all are thick skin.
Not fun of Mr Orr, but he does what his job function says he is supposed to do -
- inflation within the reach (mostly)
- low unemployment (mostly).
When it comes to the property crisis it's not Mr Orr's job to
- get land reforms done (simplify subdivision/land usage type/consents)
- incentive construction industry (training/tax incentives/support skilled immigration policies if needed/targeted investments into supply chain)
- disincentivise property gains (tax disincentives/restrictions around buying such as stamp duty, foreign ownership)
- etc.
What do the guys who are supposed to work in do? Oh, right, writing letters and making announcements.
Yes, and I would assume that the Ministry of Finance and the Gov have something to do with it as well. RBNZ can't pass many of the new policies on their own, right?
I think they are between the rock and the hard place:
a) Increase OKR/tighten lending = people/biz start defaulting = short term instability.
b) Decrease OKR/do nothing = people/biz are running for some time = higher risk of instability long term.
Latter means Gov has time to implement the things they say they'll implement to improve the situation (build those 100,000 houses and limit immigration for example). I'm not defending an asset bubble but I see some logic in RBNZ actions.
Government is run by politicians not leaders and .........less said the better about the breed called politicians.
Mr Orr cannot be given a clean chit, he knew otherwise does not deserve to be in RBNZ and should resign.
Moment they realize that housing ponzi was touching new height should have acted with same speed that Mr Orr had shown in April with least regret.
Mr Orr is guilty....can he sleep at night with clear conscious ...doubt or may be as all are thick skin.
To be fair, an economic forecast 12 months ahead having a 3.9% MAD is actually not a poor forecast.
People should remember that RBNZ was establish to maintain financial stability and risk from the housing activities are only one component of it.
It is the ruling government that is responsible for legislation, housing policies and fiscal planning.
Stop blaming RBNZ, they'd actually done a good job. The world envy us but that we ourselves have an insatiable appetite for fantasies that will never be met.
Hope their assumption / excuse pioneered by Fed that high inflation is transitory is correct. Though theykeep on moving the goal post / defination of the term high from 2% to 2.5% to 3% to 3.5%......5%.......and alsi defination of what transitory is - earlier one to two quarters than three, four.......
Any manipulatiin and lie to cover their narrative.
What a complete load of rubbish , they knew exactly what would happen if you print money and lower interest rates. They even expressed on 3s morning show last year that with this round of QE and low interest rates they will be expecting to see assets inflate and they still did nothing. This what happens in a Ponzi scheme its the biggest swindle ever and unfortunately its not going away anytime soon. If they increase the OCR which everybody is expecting from .25% to .5% they are infact doubling the interest rate on all government debt, keep doing that a few times and the government will be bankrupt along with alot of people.
What a complete load of rubbish , they knew exactly what would happen if you print money and lower interest rates. They even expressed on 3s morning show last year that with this round of QE and low interest rates they will be expecting to see assets inflate and they still did nothing. This what happens in a Ponzi scheme its the biggest swindle ever and unfortunately its not going away anytime soon. If they increase the OCR which everybody is expecting from .25% to .5% they are infact doubling the interest rate on all government debt, keep doing that a few times and the government will be bankrupt along with alot of people.
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