Adrian Orr says Reserve Bank only has 'bit role' in unsustainable house prices

Tuesday, 2 November 2021

Reserve Bank governor Adrian Orr says international interest rates have more of an impact on housing demand than its own official cash rate.

Reserve Bank governor Adrian Orr has issued a fresh warning that high house prices are unsustainable, but says its own low interest rates have only played “a bit part” in the problem.

He dismissed using the official cash rate to suppress house prices, saying that wasn’t in its mandate and would not make sense.

Realestate.co.nz reported on Monday that the average asking price for a house in October had climbed to only a little shy of $1 million at $993,135.

Orr told the Property Council of New Zealand that unsustainable house prices could pose a threat to financial stability, noting mortgages comprised more than 60 per cent of bank debt.

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Reserve Bank governor Adrian Orr voiced concern in August about the situation recent home buyers might soon be in, and since then prices have risen rather than fallen. (Video first published August 19, 2021)

Even a fear of a downturn could have knock-on effects for the economy, he suggested on the eve of the bank’s publication of a financial stability report which is expected to traverse the same concerns.

“A fear of a downturn in the asset quality of a bank’s balance sheet too often leads to credit rationing, thereby creating a self-fulfilling prophecy,” Orr said.

“Barriers to home ownership can create economic inequality and many related societal issues,” he added.

Orr said the total value of land and housing, including rental properties, stood at about $1.5 trillion.

“This equates to over half of all household wealth. New Zealanders have one very large egg in their wealth kete,” he said.

Investors needed to think about diversifying their investments, he said

“In general, the broader the variety of eggs in your investment basket, the better.”

Orr cautioned that a number of countries experienced house price declines of more than 30 per cent during the Global Financial Crisis.

“Likewise, OECD studies show that many countries experienced price falls in excess of 25 per cent and house price slumps lasting between three and 10 years, between 1970 and 2006.”

Orr said “low global interest rates” had contributed to rising house price but played down the impact of its own low official cash rate, saying it had only played a “bit part”.

“New Zealand is a ‘price taker’ when it comes to determining the level of long-term interest rates,” he said.

“We are a small economy and must accept the fact that saving and investment decisions in the rest of the world determine the bulk of our interest rate levels,” he said.

The average house price is now only few thousand dollars shy of $1m.

But Orr said he was “not avoiding all responsibility”.

“We have over recent years had to follow the level of global interest rates down as inflation expectations eased, and over recent quarters ease monetary conditions to support demand and hence employment and inflation.”

It was worth noting that while New Zealand mortgage rates had fallen, they were not exceptional internationally, he said.

“Mortgage rates here are still higher than most other advanced economies, which makes New Zealand’s more pronounced rise in house prices harder to explain.”

The “long-term fix” to ensure a well-functioning housing market – one that responded to changes in demand – was to ensure new homes could be built when needed, he said.

“In recent years housing supply in New Zealand has not been able to keep up with high population growth, leading to the lowest availability of housing in the OECD.”

Short-term interventions, such as trying to suppress housing demand, would only have a temporary effect in alleviating the situation, he said.

“Our tools are limited. For example, our loan to value ratio restriction (LVR) tool can only impose bank lending constraints on new loans – as they are being made.

“It does not impact on the vast bulk of loans already made,” he said.

The bank was also consulting on imposing debt-to-value controls on mortgage lending, he noted.

“With regard to using interest rates to target house prices, this is not in our mandate – nor does it make sense,” Orr said.

“Monetary policy is best used to manage overall consumer price inflation stability.”

But the Government’s decision to change to urban planning rules to allow more medium-density housing in large cities, would help increase housing supply, he said.

Stats NZ reported on Tuesday that the number new-home consents rose by quarter in the year ended September, compared to the year before.

“There was a record 47,331 new homes consented in the September 2021 year, a 25 per cent rise from the previous September year,” construction statistics manager Michael Heslop said.

Orr said its own monetary and financial stability tools did not increase the ability to supply more houses in response to changes in housing demand.

“And they only – very indirectly – incentivise broader investment awareness and portfolio diversification.”