By Bernard Hickey
Reserve Bank Governor Graeme Wheeler has given a broad target for success in the central bank's fight to reduce house price over-valuation and inflation to strengthen the banking system. Until now the bank has been cagey about exactly what level of house price inflation it is targeting with its high LVR speed limit.
Asked repeatedly in a Finance and Expenditure Select Committee (FEC) hearing by Labour MP Shane Jones about when the Reserve Bank would know if its high LVR speed had been successful, Wheeler said he would like to see annual house price inflation, which is running at around 16% in Auckland and 10% nationally, closer to the bank's consumer price inflation target of 1-3%.
"If we had inflation currently at around 1.2% at an annual rate and we have an objective under the Policy Targets Agreement of maintaining inflation over the medium term in the order of 2%, then you wouldn't want to see house prices for the country as a whole growing at around 10% as they are at present. You would want to see a figure much closer over time to the level of Consumer Price Inflation," Wheeler said.
Wheeler agreed the bank would not want to see signficant falls in house prices. He pointed to OECD research showing New Zealand's house price to disposable income ratio of around 4.5 was above its levels of 2.5 in the early 1990s and was 20% above its long term average.
"One doesn't want to see a significant adjustment in house prices happening quickly, by that I mean house prices falling in nominal terms, which would pose risks to the financial sector. What one wants to do is to slow down the rate of house price appreciation and our measures are basically trying to affect the demand for housing while the supply side comes into much better balance," he said.
He added the Reserve Bank would like to see the house price to disposable income lower over time.
Rental investors and foreign buyers
Elsewhere, Reserve Bank Deputy Governor Grant Spencer said there was little evidence yet to support anecdotes recounted by MPs that rental property investors were snapping up properties that first home buyers could no longer buy.
"We don't think the evidence supports the proposition that investors are taking over the market," Spencer said.
"The evidence we do have, which is not very solid, is that the participation of investors has diminished, as well as the participation of first home buyers. It hasn't been a case of simple substitution where investors have been coming in and taking the place of first home buyers," he said, referring to a BNZ REINZ survey of agents from early October.
Spencer agreed with Green Co-Leader Russel Norman that the high LVR limits would not affect foreign buyers of properties, given very few were either borrowing from the New Zealand banking system or borrowing at high LVRs.
He later said restrictions on foreign buyers in Australia and a capital gains tax had made little difference to house price inflation there.
Regional effects
Later in the appearance Labour and NZ First MPs asked about the regional effects of the Reserve Bank's high LVR speed limit, arguing that it appeared unfair to constituents that they were being hit because of measures to address high house price inflation in Auckland and Christchurch.
Wheeler and Spencer said the bank had considered regional LVRs, but decided against it because of the administrative complexity and the risk of 'boundary' issues where limits were different at the 'borders' between regions.
Wheeler said most of the impact would be hitting the Auckland market anyway, and he also said there were signs the Auckland and Christchurch inflation was spreading elsewhere in the North and South Islands.
China risk
Wheeler later said a sharp slowdown in China, potentially caused by problems in its financial system, was the biggest risk for New Zealand, given China was now its largest trading partner.
He pointed to a recent Fitch report showing China's bank lending had risen to US$14 trillion in five years, while it had taken the US banking system 235 years to growth to US$15 trillion.
"The biggest potential risk is probably around China," he said.
Fiscal policy
Wheeler was then asked by National MP and FEC Chair Paul Goldsmith about the risks to interest rates of a loosening of fiscal policy by any new Labour-Green Government.
"If you saw a strong burst of government spending or an expansion of the fiscal deficit, you'd be saying to yourself in an economy growing next year at 3%, where the rate of potential output growth was 2.25% to 2.5%, that if you then saw the government sector increasing demand in the economy by running a bigger deficit, it will put further pressure on the central bank in terms of its interest rate response, and would potentially put further upward pressure on the exchange rate," Wheeler said.
Any government running smaller deficits or moving into surplus "would be helpful for our current account deficit and helpful for interest rates."
33 Comments
"Any government running smaller deficits or moving into surplus "would be helpful for our current account deficit and helpful for interest rates.""
Oh the irony of that response to Nationals questions. When Labour is the party with a history during their last 9 years of consistent surpluses and saving for the superannuation crises we will face in 30 yearas.
Joh Key comes in, put taxes up for all, then gives a fat tax break to the richest and runs the budget into deficit.
Dtcarter - do you really think that even the lefties on here don't consider Helen Clark's global economy (I.e. Credit fueled boom time with no earthquakes) isn't slightly different to the past 5-6 years? The ones on here are mostly well read, so I suggest letters to the editor might get you a more receptive audience with some.
France, Italy, Spain were the ones I remember her citing regularly and being matey with their fellow socialist Presidents. It's not really worth debating Steven, I don't think anyone will argue that it hasn't been grossly poor economic management from those countries, and France is heading dramatically further into the mire as the less than intelligent average Frenchman subsequently elected an even more socialist President - we get what we vote for I guess.
All Hail the former Global Dictator Helen Clark who forced the entire Western World on a credit fueled speculative property investment binge. Funny how it actually began in the United Kingdom when monetarists at the Bank of England convinced the British government to liberalise and deregulate the British financial system as far back as the mid 1970s with all too predictable consequences.
Actually Roger, back then the United States economy was structured around productive agricultural and industrial development, real estate was still essentially subsidiary to that. Yes they had their fair share of property booms nd bust especially associated to the developedment of publically funded infrastructure such as canals and railroads, but it was only in the 1980s that finance ascended to the dominant role in the .US economy as the US industrial capacity was hollowed out by Paul Volcker's tight monetary pollicy of the late 1970s and early 1980s. He all but acknoledged that it was deliberate policy in a New York FEd paper called The Political Economy of the Dollar.
Yes they spent heavily, but within responsible parameters, running a surplus and saving for the headwinds we will face when the boomers retire, unlike e.g. Labour in the UK, and most western governments for that matter.
Agree they should have done more to correct the housing imbalance, adding a CGT to property investment, or otherwise removing the tax penalty for other forms of investment.
Gosh... We have a Global property bubble in the making.... and it may still be in the early stages.??
The only tool of Destruction ( bubble destruction ) that Wheeler is using is a LVR restriction.
Interest rates are still historically low...... the fundamental drivers for property are very positve.
And here he is talking about Property inflation mirroring the CPI..
Very wishful thinking on his part..... especially when he is allowing broad money supply M3 to grow at 6%+
http://www.interest.co.nz/charts/credit/money-supply
What can he do..???
What consumer spending? Sure more 1s and 0s exist, sitting in banks or being used to push up commodities and generally speculation by financiers.
So no, more money has had little material effect on the economy, unless maybe its managed not see us in a Depression yet and deflation.
The difference is wall street v main street.
regards
So DS Wheeler states Nz homes are overpriced.........then decides a 2% annual inflation rate is ok? Is that a -2%?
All you had to do Wheeler was push the OCR up 2% mate and you would of created a solution.........but.............that takes guts. Something the RBNZ has never had, along with the right answer to anything EVER
If he push ocr up, wave of funds enter new Zealand seeking the higher returns from term deposit - think bored Japanese housewives borrowing at next to 0% to earn 2%
More funds in new Zealand – less cost for the local banks, mortgage rate goes down, (due to lower costs) exchange rate gos up due to demand for kiwi deposit account. House prices go up even faster - banks have more money to lend.
It’s a catch 22.
There is no necessity for an increase in the OCR to raise the kiwi dollar. Banks don't have to accept foreign deposits. They only do so if they believe they can loan them out ie there has to be demand for loans. Otherwise excess deposits are a liability, creating an obligation and owing interest with no reciprocal interest coming back, detrimentally affecting bank profits. It is mortgage and rural demand for credit that is driving the dollar higher not the deposit rates per se.
Banks faced with lower credit demand will reduce deposit rates to deter deposits from abroad reducing the dollar. Wheeler reducing demand with the LVR restrictions is a step in the right direction. Now if he would apply restrictions to investment properties and rural loans as well....
They are all completely potty. What to do? I did have a silly idea that if the government actually did run a surplus then Mr Wheeler could just print some NZD for good behaviour as it were, buying and cancelling a similar amount of government debt as the government repaid. Trouble is where would it end?
Is there any course of action other than just put up with the stupidity overseas and try to limit the damage (ie increase in debt) here, until such time as the next hiccup occurs?
Since Iain Parker no longer comments here, I'll take up the Public Credit batton.
The concept of Public Credit works on the principle that this process should not be in the hands of corporations but the property of the commons – generally the government. This is perhaps where the biggest opposition to the concept arises. While many people would agree that it seems ridiculous to allow corporations, overseas owned ones at that, to generate electronic money and charge interest for it, giving this power to politicians would be just as bad, if not worse. At least banks, the argument goes, are more likely to restrain their lending and be more prudent in who they loan to because of their commercial acumen, risk management processes and the discipline of the market. The GFC has rather dented this argument. As Martin Wolf of the Financial Times notes:
”The essence of the contemporary monetary system is creation of money, out of nothing, by private banks’ often foolish lending. Why is such privatisation of a public function right and proper, but action by the central bank, to meet pressing public need, a road to catastrophe?”
Perhaps the most cogent exposition of the Public Credit concept is a paper by Joseph Huber and James Robertson for the UK think tank New Economics Foundation. They don’t propose either the legislative or executive arms of government have the right to create non-cash money but rather the increase or decrease of the money supply is controlled by a non partisan panel, in New Zealand’s case at the Reserve Bank. An inflation target would remain but at any given time they determine how much money the economy needs to maintain this target.
The government of the day gets to decide how the money is spent rather than loaned into circulation and would have to determine its spending priorities accordingly.
Thus the Reserve Bank rather than relying on the indirect and often slow acting process of interest rate setting to influence the level of credit demand in the economy would instead have a more direct lever via government spending. Governments could still determine taxes but this Reserve Bank panel would adjust the level of additional funding to keep inflation in check. Because the Reserve Bank is creating money for the government to spend directly and it is not an interest bearing loan, the theory is more money can be put into circulation and/or taxes lower as the government does not have to worry about interest repayments.
http://unframednz.wordpress.com/2012/06/17/debt-jubilee-for-new-zealand/
The main problem would be the chaos caused by the transition. Financial markets would stampede out of the NZD and cause, at least temporarily, very high imported inflation. At the same time the NZ government would come under huge pressure from both the financial industry but also their pet politicians, here and overseas, to reverse it. This could include overt or covert trade sanctions, so vehement would be the opposition and the need to make an example.
Not so long ago QE was unthinkable.... QE is just a meally mouthed version of debt monetisation without doing the ledger entry from one government pocket to another. The argument would be well NZ is forced to do it because of the effect of the QE of others before us.
Yeah except QE is the Fed/BoE/BoJ creating credit money to give to the banks at next to nothing to loan to the public with interest. It's to save the banks first and hope some extra borrowing/debt stimulates the economy.
Public credit is bypassing the banks and letting the government spend it into circulation, stimulating economic activity directly and at no or very low interest.
The key is I think, reducing bank lending by an amount equal or greater than the public credit. Then it's non inflationary. The only argument is then the value/virtue of government spending versus private spending. Infrastructure versus property perhaps.
That was a stupid statement. Your average kiwi can't access foreign loans. Nor should he suggest it. Ask Icelanders who took out mortgages denominated in Euros or Yen. Or the Baltic states. If property in Auckland takes a hit along with the NZD those Chinese "investors" who borrowed offshore will be wearing big losses.
Very unlikely to happen, Chinese investors have large deposits (as per 7 Sharp documentary last night), and long time horizons, they would just wait and ride it out. I know a Chinese guy who told me his friend was mortgage free within 6 years due to about 150k landing in his bank account from parents in China each year. I would think that this sort of thing is not uncommon.
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