Red-letter day in move on property

For the first time in New Zealand’s modern monetary policy regime, a sitting finance minister yesterday publicly told the Reserve Bank governor that the bank needs to think specifically about out-of-control house prices.

In a highly unorthodox intervention, Minister of Finance Grant Robertson wrote to Reserve Bank Governor Adrian Orr unprompted yesterday. The letter was not part of the regular Policy Targets Agreement that ministers sign with the Reserve Bank setting the country’s target interest rate and what monetary policy should be trying to achieve.

The letter came about as REINZ figures show an almost 20 per cent rise in median house prices over the past year, caused by fewer houses on the market, more demand for them and cheaper mortgages.

In the letter to Orr, Robertson stated that ‘‘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’’.

The minister of finance said that he wanted the central bank to think about the ways it and the Government could work together to achieve a ‘‘sustained moderation in house prices that we have both sought’’.

The letter to Orr suggests this could include asking the governor to consider the stability of house prices when the bank makes monetary policy decisions, including decisions about interest rates.

The Reserve Bank sets interest rates through the official cash rates. The decision is made by its Monetary Policy Committee.

Robertson has also directed Treasury to investigate ‘‘further demand-side measures’’ to curb prices.

‘‘I expect to receive that advice towards the end of the year, and will discuss it with Cabinet as soon as possible after that,’’ Robertson said.

Late yesterday, Orr responded with another letter saying the bank welcomed ‘‘the opportunity to contribute to [Robertson’s] work programme aimed at improving housing affordability’’.

With house prices breaking records around the country, and Westpac forecasting increases of another 15 per cent this year, out-ofcontrol property inflation has become a hot-button political issue.

Some of the blame for this situation has been sheeted home to the Reserve Bank, which has been printing money this year to stimulate the economy.

In its response to the Covid pandemic the bank has promised that it could print as much $128 billion across its various stimulus programmes, and it’s feared a lot of that money will head into an already overheated housing market.

Robertson was very careful to emphasise that he was still a proponent of an independent Reserve Bank – the letter had ‘‘started a conversation’’ and it wasn’t telling the bank what to do, he said.

‘‘I want to be clear I am not proposing any changes to the mandate of the independence of the Reserve Bank.’’

He also wanted to stress that ‘‘this 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’’.

Over the past decade a widespread consensus has formed that the biggest factor in the price problem is a lack of supply.

For three decades, New Zealand has failed to build enough houses to meet the demand of its growing population.

‘‘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,’’ Robertson said yesterday.

After the abject failure of its flagship KiwiBuild policy in the first term, Labour will feel the pressure to deliver in the next three years.

The Reserve Bank’s aggressive attempts to ratchet down interest rates have lowered borrowing costs for many – unleashing a wave of demand for housing.

The National Party’s shadow Treasurer, Andrew Bayly, last week called on Robertson to write to Orr, telling him to direct the central bank to direct some of its programmes towards business lending and away from residential housing.

Robertson pushed back on the suggestion that he had copied Bayly’s idea, noting that he was not proposing to issue an instruction to Orr but was instead hoping to reach an agreement on the overall policy target of the bank.

Robertson made the announcement as the Government released its financial statements for the year ended June 30.

The Government booked a painful $23.1 billion deficit this year. The Covid-19 pandemic has wiped $30.5b off last year’s surplus, which is likely to be the last surplus for some time.

Yesterday’s audited accounts painted a grim picture of the financial hit copped by the Government thanks to the pandemic, but there were also shoots of optimism.

The accounts, while still bad, are considerably better than what was forecast at the May Budget.