Orr frets over inflated asset prices

People should be very worried about soaring asset prices that have been driven by low interest rates, Reserve Bank governor Adrian Orr says.

Responding to questions at an economics forum hosted by Waikato University in Hamilton, Orr suggested people were not pricing in risks in the sharemarket and housing market correctly.

There were ‘‘big question marks’’ over global equity prices relative to underlying earnings and ‘‘absolutely a question mark over house prices globally and in Aotearoa New Zealand, relative to household earnings’’, he said.

People should take that on board, especially when leveraging their property interests to buy more houses, he said.

Orr’s warning came despite the bank last month forecasting a further small rise in house prices of 3.9 per cent in the year to the end of March next year, and criticisms it is the bank’s own policies that have helped drive an asset bubble.

Even as many homeowners’ paper wealth and confidence has been boosted by low interest rates, ASB chief executive Vittoria Shortt sounded a different alarm.

Shortt told the conference the bank was closely watching a worrying trend over the past two months of more customers having difficulties making payments and running low on cash. ‘‘Fewer customers have what we would describe as ‘a rainy day savings fund’ of $1000 or more, which is a pretty low bar,’’ she said.

Both Orr and Shortt stressed the economy was a long way from being out of the woods of the Covid crisis, with Shortt saying ASB expected unemployment to rise slightly over the coming months.

Border restrictions, the rollout of vaccines and new strains of Covid were all issues globally, she said.

‘‘We are seeing some doubledip recessions in large parts of the global economy such as Europe.’’

Businesses in New Zealand had yet to respond strongly to the Reserve Bank’s monetary stimulus, she suggested, with many being more concerned with having resilient balance sheets and getting more clarity on the economic outlook.

That had led them to take a ‘‘wait and see’’ approach to investments, she said.

‘‘Even though there is a lot of credit available and the price of that credit is extremely low, that is not enough to really encourage businesses to take that next step forward.’’

Orr warned the chances of the economy maintaining its current momentum were ‘‘always going to be first and foremost a function of the health outcomes as we go through this global vaccine challenge’’.

‘‘There is no bigger variable that is going to determine economic outcomes than the health outcome and the policy responses to the health outcome,’’ he said, stressing the environment was uncertain.

‘‘There is going to be a long lag,’’ he said.

‘‘The global vaccine roll-out is fantastic; it means we can now see the horizon to this pandemic but the horizon is still some way off, and it is going to be a long period before sufficient global immunity is there and we turn back to whatever the new normal looks like in economic activity.’’

‘‘We can now see the horizon to this pandemic but the horizon is still some way off.’’

Adrian Orr

Reserve Bank governor