Orr ‘failed’ with house price messaging

The Reserve Bank is blaming the public for taking the money that it cut to bargain basement prices, economists say.

After lifting its official cash rate by another 50 points on Wednesday, to 3%, the Reserve Bank predicted house prices could fall up to 20% from their peak.

Governor Adrian Orr said prices were closer to what it considered a sustainable level, from being unsustainably high.

‘‘We have been saying to many people – think very hard before making significant large lifetime purchases such as a home,’’ he said on Wednesday.

The bank was not heartless, but ‘‘we were making as much noise as we possibly could to people over the last two years about ‘think wisely, there’s no such thing as a one-way bet when taking risk’,’’ Orr said.

As the Covid pandemic hit in early 2020, the Reserve Bank cut the OCR from 1% to 0.25% and said it would stay at that level for at least a year.

House prices slumped in early 2020 but began to soar later that year, boosted by low interest rates.

They were rising nearly 30% annually at their peak in late 2021 when the national average price passed $1 million, before falling this year. The market has lost $40 billion of value in six months, according to Corelogic.

The Reserve Bank did warn a number of times last year that recent home buyers were borrowing more relative to their income, and might be vulnerable to higher mortgage rates or a fall in house prices.

Economist Benje Patterson said Orr warned people but not in a way that got the message through.

‘‘Some young couple trying to get

Shamubeel Eaqub

into their first home, really excited, they’ve got their deposit, they finally got over the line at an auction, why are they going to listen to him? Some man in a suit telling them to be careful. They don’t actually know him, he’s not actually relatable.’’

And when interest rates were low, people could handle the mortgage payments and the alternative would have been to have not bought the house.

‘‘Some of us knew that of course houses can go down. But New Zealand house prices always seemed to defy gravity. And so no-one actually ever truly buys into the fact that you might get yourself into a sticky situation.’’

The price of money got so cheap it would have been silly not to take it, Patterson said.

The OCR was an incredibly blunt tool to do all the heavy lifting, but it helped keep money flowing at a time when there was a crisis.

‘‘The problem is they’re taking a sledgehammer to things with the OCR ... when we’ve got house prices beginning to fall, also confidence in businesses and among households has also come off the boil. We’re seeing corporate earnings not looking as good as they were.

‘‘At the time, employees are massively gaining the upper hand on wage bargaining. And it’s becoming really entrenched, those pay increases. And so the worry is now that the bank might actually have to go much harder for longer than you’d normally go when you’ve got a softening economy,’’ Patterson said.

Economist Shamubeel Eaqub said people did not care what the Reserve Bank said, what mattered is what it did.

‘‘And what they did was they made it easier and cheaper to borrow lots of money to buy and sell houses. And that’s what people did, people respond to incentives, and [the bank] created those incentives.

‘‘They can’t turn around and say, ‘but we told you not to do this thing that we’re making it much easier to do’. You can’t have inconsistent behaviour, and then turn around and say, ‘it’s all your fault for what’s happened’, it’s a bit ridiculous,’’ Eaqub said.

‘‘People respond to incentives, and [the Reserve Bank] created those incentives.’’