Adrian Orr and Grant Robertson with quills.

PoliticsNovember 25, 2020

Grant Robertson v Adrian Orr: those letters, decoded

Staff writers

Adrian Orr and Grant Robertson with quills.

The New Zealand housing crisis, and how to tackle it, took epistolary form yesterday in letters from the finance minister and the Reserve Bank governor. We read between the lines.

Yesterday the finance minister, Grant Robertson, penned a letter to the governor of the Reserve Bank, Adrian Orr, on the subject of the housing market, and what might be done about it. Here’s our translation of that exchange, with perhaps a lick of interpretation, of what they mean. Our annotations – between the lines – are in bold.

Hon Grant Robertson

Minister of Finance

November 24, 2020

Dear Adrian

I am writing to you to seek your views on ways the government and Reserve Bank can work together to address the issue of rising house prices, as part of a wider suite of work that the government is carrying out on housing market settings in the economy, both on the demand and supply sides of the housing market.

The housing market is spiralling out control and you’re fixing it.

In the February 2019 Monetary Policy Remit, the government states that its economic objective is: “…to improve the wellbeing and living standards of New Zealanders through a sustainable, productive and inclusive economy. Our priority is to move towards a low carbon economy, with a strong diversified export base, that delivers decent jobs with higher wages and reduces inequality and poverty”.

Our priority is not more of the same skyrocketing house prices that we promised to stop.

I am aware that the Monetary Policy Committee is facing increased challenges following the large and unusual shock to the domestic and global economies as a result of Covid-19. This is a phenomenon around the world, which governments and central banks are grappling with. For New Zealand, I am concerned that the recent rapid escalation in housing prices, and forecasts for this to continue, are affecting the government’s ability to meet the economic objective set out in the Remit. I am also concerned about the potential that these price increases may present a financial stability risk to the economy, particularly when monetary policy returns to more normal settings.

Seriously, this is bad. French Revolution bad.

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. 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.

Guillotines bad.

House prices are influenced by more than monetary policy. In addition to the changes suggested here, the government has a wide ranging work programme aiming to improve housing affordability.

We’ll try some stuff too.

I am aware that the MPC is making increasing use of Alternative Monetary Policy tools by making interventions into financial markets to support the economy as a consequence of the impact Covid-19 is having on the domestic and global economies. The Alternative Monetary Policy tools that are now being used by the MPC were not envisaged at the publication of the February 2019 Remit. I believe it is right that we consider how these tools might be impacting the housing market, with particular regard to housing price inflation.

It’s easier to print money than to print houses.

I want to make clear that I am not proposing any change to the overall price stability and employment objectives of the Monetary Policy Remit. I also remain committed to upholding the operational independence of the setting of monetary policy by the Monetary Policy Committee (MPC).

Don’t freak out, I’m not touching the law.

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.

But I could if I wanted to.

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. I have included a suggestion for how this might be done, and would be interested in your views on this:
b) In pursuing the operational objectives, the MPC shall:
i. Have regard to the efficiency and soundness of the financial system;
ii. Seek to avoid unnecessary instability in output, interest rates, the exchange rate, and house prices; and
iii. Discount events that have only transitory effects on inflation, setting policy with a medium-term orientation

Our discussion will conclude with us agreeing these things.

I would welcome your views on any alternative proposals with regard to the Reserve Bank’s monetary or financial policy that would help address our concerns. This includes your views on any other changes that the Bank could make to support the aim of achieving the sustained moderation in house prices that we have both sought. I look forward to your response to this. The government is planning to make any changes, if agreed, soon, and so I would request that you gave it your earliest possible consideration.

Our discussion will conclude quickly.

I want to finish by thanking you and the MPC for your role in providing stability and support through the difficult period of Covid-19. I have greatly appreciated the collaborative way that you have approached your task, and I look forward to continuing to work that way.

You saved the economy, now save housing / our political bacon.

Yours sincerely

Hon Grant Robertson

Minister of Finance

Adrian Orr

Governor, Reserve Bank

November 24, 2020

Dear Minister

Thank you for your letter received November 24, 2020, seeking our views on ways we can work together to address your concerns regarding rising house prices. We welcome the opportunity to contribute to your work programme aimed at improving housing affordability. As I’ve said publicly on many occasions, monetary and financial regulatory policy alone cannot address this challenge. There are many long-term, structural issues at play.

Lol, as if it’s our fault.

I acknowledge that you do not propose any change to the economic objectives set out in Section 8 of the Reserve Bank Act – to maintain overall price stability and employment objectives.

We’re going to keep doing what we’ve been doing.

I also acknowledge your ongoing commitment to the operational independence provided by the Act for specific monetary policy decisions.

Back off.

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.

And then back off some more.

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.

Thanks so much for alerting us to house prices we had never ever noticed them before. FFS.

Higher-risk lending for housing purposes is also an important consideration for financial stability. We have for many years identified the risk that highly-indebted households and businesses can pose to the financial system. This concern is why we recently signalled our intention to reinstate loan-to-value ratio restrictions for higher risk lenders, in particular, property investors.

We’ve been warning you about this for years, dude.

As you note in your letter, the Reserve Bank has faced challenges in response to the economic shocks and uncertainty that has resulted from the Covid-19 pandemic. We are committed to continuing to provide stability and support.

But recently we’ve a little bit busy saving the economy.

Like other central banks globally, our key response to the Covid-19 economic shock has been to lower interest rates using a variety of tools. Lower interest rates promote spending and investment, thereby enabling us to meet our inflation and employment mandate over the medium-term.

Economic nosedive and bread lines around the country would’ve kept house prices down, if that’s what you were after?

Our monetary policy actions have been, and will continue to be, effective in supporting the economy through the Covid-19 economic shock. Effective monetary policy is incredibly important for our shared objective of promoting the prosperity and wellbeing of all New Zealanders.

You’re welcome.

Yours sincerely

Adrian Orr

Governor

Keep going!

Finance minister Grant Robertson has a massive challenge ahead of him. (Photo: Getty Images/Photo illustration: Tina Tiller)

PoliticsNovember 24, 2020

Grant Robertson today moved to ‘reset the clock’ on housing. Can it work?

Justin Giovannetti

Contributing writer

Finance minister Grant Robertson has a massive challenge ahead of him. (Photo: Getty Images/Photo illustration: Tina Tiller)

The government has conceded that soaring house prices are increasing inequality and poverty, and the finance minister wants the Reserve Bank to do something about it. Justin Giovannetti writes from parliament.

There’s been an invisible wall down the centre of Bowen Street in Wellington for a generation. On one side is parliament and elected officials, on the other are the guardians of the country’s economy, the independent Reserve Bank of New Zealand.

Today, the first signs of a fresh crack in that wall appeared. Over the past few months the two sides of Bowen Street have been increasingly at odds over house prices. The finance minister, Grant Robertson, is now looking to bring the central bank into line by changing the way it sets monetary policy.

At the heart of this are two institutions doing what they’re supposed to be doing. The Reserve Bank has been doing its job since Covid-19 hit. Its mandate is to keep the economy growing and curb unemployment. Independence is supposed to insulate it from some of the repercussions of that mandate. Social issues, like increasing inequality, are a problem for parliament across the street.

New Zealand’s economy has been doing better than expected, despite a global pandemic. A lot of that can be attributed to a Reserve Bank that jumped on the problem immediately. It slashed the cash rate to 0.25% from 1% in March. That makes it much cheaper to borrow money. But that wasn’t enough as Covid brought the global economy to a shuddering halt.

The Reserve Bank then announced its intention to flood the country with up to $128 billion in new money over the next term of government. That torrent of money, which has already started, has driven down borrowing costs to near zero. That means commercial banks, as well as a lot of businesses, are now flush with cash. Where’s that money going? It’s been pouring into the housing market.

Anyone who has been at an open house in recent months, or has been hit with a hefty rent increase, knows what’s happened. The Real Estate Institute of New Zealand says the median price of a home has shot up by 16.4% over the past year.

To the Reserve Bank, that’s not a problem for it to worry about. “Complaining” about house prices is a “first-class problem”, bank governor Adrian Orr said last week.

Reserve Bank of New Zealand governor Adrian Orr (Photo: Getty Images)

Increasing home prices are generally speaking a good thing for the Reserve Bank. It means people with investments and homes are richer on paper, so they’re more likely to spend freely and with confidence. More spending is good for the economy. As home prices climb, they can borrow more and spend more.

While the complaints might not have moved Orr, they’ve moved Robertson and the government. With its legislative agenda at risk of being swamped by a growing housing crisis, Robertson announced today that the government is resetting its housing agenda. The first move: moving towards telling the Reserve Bank to stop pouring money into the economy and making the situation worse. House prices are now Orr’s problem as well.

“What we’re concerned about is rapidly increasing house prices, we’ve already seen banks projecting 15 to 20% increases in prices next year,” said Robertson. “Today is the day we’re saying we want to reset the clock.”

The problem, according to Robertson, is that house prices now threaten the country’s long-term financial health by creating more inequality and poverty. People without homes or investments will grow poorer, facing higher barriers to buy a home, and higher rents as landlords look to recoup their investments.

In practical terms, the government is asking the Reserve Bank to start a conversation about changing a few words in its remit. The existing Reserve Bank mandate, to boost the economy and lower unemployment, would remain.

There are already a few secondary issues that the bank’s Monetary Policy Committee needs to consider when making decisions. Along with ensuring that the financial system remains sound, the bank needs to try to keep prices, interest rates and the value of the New Zealand dollar stable. Housing prices would now be added to that list.

The Reserve Bank can, technically speaking, say no to the change. In a letter this afternoon, Reserve Bank governor Adrian Orr responded without a hint of submission to the minister’s request. He said the Reserve Bank would “consider” Robertson’s letter and “respond with considered feedback in due course.” Orr then added that the bank already does consider house prices when it makes decisions, so the change wouldn’t amount to much anyway.

As recently as last week, Jacinda Ardern said she didn’t want to interfere with the Reserve Bank, warning that past governments had learned “hard lessons” from messing with the central bank. She was referring to Robert Muldoon’s time at the helm.

However, the bipartisan consensus that the Reserve Bank’s independence is sacrosanct has been fraying in recent weeks. National had been calling for the government to rein it in. The apprehension about issuing instructions to the bank has disappeared as the scale of the housing crisis has become clearer. Every month brings ever higher prices, defying economists who’d expected a crash.

One of Ardern’s “concerns” stated in recent days, is for first-time buyers. New Zealand, she’s said, shouldn’t be a country where buying a home is limited to young people with parents who have deep enough pockets to cover their deposit. It might already be too late. Any first-time buyer who has applied for a mortgage recently would know this as the gentle question from a bank of whether or not a “donation” is expected from family.

The government’s plan is not to lower home prices, but simply to limit the increases to something more manageable. “A period of sustained moderation,” Robertson said.

Existing programmes to support first-time buyers have been inadequate, Robertson said today. In most cities, the government’s programmes don’t come close to providing the help someone would need to buy a home.

PM Jacinda Ardern and deputy Grant Robertson (Getty Images)

Ardern, and Robertson again today, have repeatedly ruled out a capital gains tax, in any form. Greens co-leader Marama Davidson had suggested a tax on capital gains by stealth, through existing taxes, but that was crushed by the prime minister.

As part of the housing reset, the government will look at what it can do to increase supply. By some estimates the country needs 100,000 more homes, but scaling up of construction is constrained by a shortages of builders. Some councils have also been reluctant to consent large-scale projects because of the costs of building associated roads, pipes, emergency services and other costs.

The government will also look to reduce demand. Robertson said that could include increasing the length of time someone needs to hold onto a house before it can sell, or face the so-called bright line tax.

One thing that’s unlikely to come out of today’s reset is a move by the Beehive to massively increase spending. Robertson shied away from any suggestion that he’s prepared to spend more. Most problems can’t be punted across Bowen Street. The Reserve Bank can’t do much for people on the cusp of poverty. It deals with the economy in abstractions, tinkering with interest rates and other accounting moves.

Where increasing housing prices worsen poverty, parliament can help. However, the Ardern government has ruled out a benefit increase for the poorest in society, because it says we can’t afford it. That happened as the Reserve Bank handed home and business owners billions of dollars, because it said it couldn’t afford not to do it. That’s the gap that Robertson is now looking to bridge.

Parliament’s reluctance to spend is near the centre of the housing crisis. Robertson began his presentation today talking about how the government has beat its projections according to the final economic accounts for the last fiscal year. Revenues are up, expenses are down and the deficit is lower than expected. That relatively rosy situation however hasn’t translated into spending to help those who haven’t benefited from the Reserve Bank’s money tsunami. It’s still unclear what the government intends to do for them.