Reserve Bank ordered to consider housing in decision-making

Thursday, 25 February 2021

Reserve Bank economists explain why they think housing inflation is almost over.

Finance Minister Grant Robertson has instructed the Reserve Bank to now consider the impact on housing when it makes monetary and fiscal policy decisions, such as setting the official cash rate.

Changes have been made to the remit of the bank’s Monetary Policy Committee, requiring it to take into account government policy relating to more sustainable house prices, while working towards its objectives.

“The committee retains autonomy over whether and how its decisions take account of potential housing consequences, but it will need to explain regularly how it has sought to assess the impacts on housing outcomes,” Robertson said.

Low interest rates and quantitative easing have been blamed for pushing up asset prices over the past six months.

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House price inflation has increased to nearly 20 per cent, year-on-year, with the official cash rate sitting at a historic low of 0.25 per cent.

“The bank will have to take into account the Government’s objective to support more sustainable house prices, including by dampening investor demand for existing housing stock to help improve affordability for first-home buyers,” Robertson said.

“The Reserve Bank’s objectives and mandate remains the same, which is to maintain price stability, support full employment and promote a sound and stable financial system.”

What does the official cash rate mean?

The Reserve Bank is expecting annual house price inflation to drop from double-figures to just 3.9 per cent in the year to March next year.

It has forecast annual house price inflation will top 22 per cent in the year to the end of June.

But the bank’s chief economist Yuong Ha told Parliament’s Finance and Expenditure select committee on Thursday that it believed almost all of that annual increase had already taken place over the last eight months.

“A lot of the factors boosting housing prices we think will either diminish or turn around,” he said in response to questions from National Party revenue spokesman Andrew Bayly.

The change would come as a result of the reinstatement of loan-to-value ratios, “very high levels of residential consents that will lead to more construction and more supply”, and reduced inbound migration in the wake of higher border closures, he suggested.

“Our scenario is house price inflation will moderate considerably.”

Earlier Reserve Bank governor Adrian Orr downplayed the impact of loose monetary policy on house prices and other assets when facing the committee.

“House prices in particular will be driven by many factors of which fiscal and monetary policy are ‘some’”, he said.

“The domestic and international research shows the ‘number one’ impact on asset prices and house price in particular is the supply of that asset.

“It is the supply though time that really influences what are sustainable house prices.”

Robertson has also asked the Reserve Bank to provide advice on debt-to-income ratios and interest-only mortgages.

National revenue spokesman Andrew Bayly says the government move is the right one, but it should have happened last year.

“I want to understand the extent to which interest-only mortgages, particularly to speculators, pose risks to financial stability, and whether restrictions should apply. Some jurisdictions, like Australia, have in the past applied restrictions on interest-only mortgages due to financial stability risks,” he said.

With regard to debt-to-income ratio limits on housing loans, Robertson said he had made clear that “in principle I would want these to apply only to investors”.

“It’s important that any potential restrictions do not disproportionately affect first-home buyers and low-income borrowers,” he said.

Robertson described his intervention as the first step as the Government considered broader advice on how to cool the housing market.

“We know the rapid increases we have seen in recent months are not sustainable, which has meant many first-home buyers are struggling to access the market. We’ll be making further announcements in the coming weeks on other policy responses,” he said.

Orr welcomed the moves, which he said would “increase the focus on understanding and communicating the impact of the bank’s decisions on house price sustainability”.

”The minister’s direction is in tune with our recent advice to the Government in which we detailed the many influences on house prices, including the actions of the Reserve Bank,” he said.

“We have a long-standing commitment to transparency about our policy actions and approaches, and this will continue,” he added.

But Bayly said the intervention had come too late.

“Directing the Reserve Bank to factor the impact on housing into monetary and financial policy decisions is the right move. The issue is how long it took the Government to realise this,” he said.

“The opposition proposed such a move back in November. The finance minister should have acted then, but instead he let the red-hot property market continue to burn,” he said.

Infometrics economist Gareth Kiernan said he did not expect the orders to change the bank’s official cash rate decisions dramatically, because it still had to meet the same key objectives it had previously.

But it would require the bank to consider housing more closely as it did so, he said.

The move would also make sure that all government agencies were “pulling in the same direction”, he said.

“Making sure that the Reserve Bank is explicitly on the same page as everyone else is important, but it's also important to retain independence from the executive wing of government.”