NZ Finance Minister Grant Robertson
The Ardern Government is attempting to rework the remit of the Reserve Bank of New Zealand’s Monetary Policy Committee to take specific account of how its decisions impact house prices.
New Zealand is experiencing an unprecedented property boom that has put home ownership beyond the reach of tens of thousands of first home buyers.
In the 12 months to the end of October 2020 median house prices in New Zealand soared almost 20 per cent to a record high of $NZ 725,000, according to the Real Estate Institute of NZ.
The boom has created a political headache for the government, which is now seeking consent from the RBNZ to amend the Monetary Policy Committee’s mandate.
The legal remit currently requires the MPC to avoid monetary policy settings that create “unnecessary instability” in national production, interest rates and the exchange rate.
However, in a letter to RBNZ Governor Adrian Orr on Tuesday, NZ Finance Minister Grant Robertson has sought feedback from the central bank on whether “house prices” should also be added to the list of unnecessary effects that monetary policy should avoid.
“I am open to a discussion with you about what is the best approach that the Reserve Bank could take to support the Government in meeting our goals,” Robertson told Orr in the letter.
“One option I would be interested in your views on is changing Section 2b of the February 2019 Remit to better highlight that the MPC takes house prices into consideration when formulating monetary policy to help achieve the Government’s objectives.”
While Robertson acknowledges in the letter that house prices are influenced by factors outside monetary policy, the RBNZ has come under intense public scrutiny this year for its decision in March to slash the official cash rate to 0.25 per cent from 1 per cent.
There is mounting theorising among senior economists that the RBNZ will lower the official cash rate to below zero next year.
“House prices are skyrocketing, and we think this is just the beginning,” said Westpac NZ’s chief economist Dominick Stephens in a report published last week.
“By mid-2021 house price inflation will be 15 per cent, roughly the same as 2016 – the political and social fallout will be just as intense as it was back then.
“Rising house prices are an unintended consequence of the Reserve Bank’s interest rate cuts.”
In a swift response to Robertson’s request, Orr indicated the bank would consider Robertson’s proposed amendment, while also welcoming the government’s “ongoing commitment to the operational independence provided by the Act for specific monetary policy decisions”.
“We will consider your suggestion of how the Monetary Policy Committee (MPC) could further take into account house prices when formulating monetary policy, and will respond with considered feedback in due course,” he told the Finance Minister.
“I can assure you that the MPC, in making its decisions, gives consideration to the potential impact of monetary policy on asset prices, including house prices.
“These are important transmission channels that affect employment and inflation.
“Housing market related prices are also included in the Consumer Price Index, for example rents, rates, construction costs, and housing transaction costs.”
Robertson told Orr that he was concerned that the recent escalation of house prices might present a financial stability risk to the economy especially when monetary policy returns to more normal settings.
“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,” Robertson advised Orr.
“This is particularly the case where investments in the economy are increasingly being made in the existing housing stock, rather than in other more productive assets.”
The New Zealand debate over the wisdom of keeping a harsh clamp on official rates is likely a portent of similar ructions in Australia as the property market recovers.