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  • Robert MacCulloch

Deconstructing the Reserve Bank-House Price Debacle

Today the debate over high Auckland house prices and the role of the Reserve Bank in fueling them blew up to engulf our political leaders. How did we get here in the first place?


First, the origin of the housing affordability crisis was the ramp up in our population by around one million people over the past 17 years that successive governments implemented.


Second, the Reserve Bank has morphed into an institution independent only on paper (i.e., in legal acts of parliament). Its actions suggest that it has become a highly partisan organization. For example, it has become heavily involved in the climate change debate. The Bank has also engaged in an over-sized "quantitative easing" program of up to $100 billion purchases of long dated government bonds. Part of the reason appears to have been to facilitate an election victory for the incumbent government by depressing the cost of its borrowing. It is the reduction of the longer run rates that has fueled house prices the past year. The Bank's argument that house prices are outside its narrow remit is disingenuous. How on earth can climate change be within its remit if house prices are not?


Third, the Prime Minister is trying to argue that to the extent the RBNZ is to blame for housing affordability problems, it is not her fault since the Bank is independent. The only problem is that the Bank is not independent. It used to be. But it hasn't been acting independently these past three years.


Meanwhile, the new National Party Shadow Treasurer, Andrew Bayly argued today that “Our view is that the Reserve Bank can, and should, be requiring banks to direct new funding from the Reserve Bank into productive parts of the economy, particularly business lending ... If the Government takes the housing situation seriously, it will send a letter of expectation to the Governor immediately". This suggestion would not end well. Why? The RBNZ shouldn't get into business lending, either directly or indirectly. That would further politicize the Bank and open it to allegations of favoring one group over another. Should the RBNZ itself lend direct to private firms, it would have to create its' own credit risk department. Besides, critics of the RBNZ's own stringent capital requirements always maintained they would limit banks tendency to support "productive", yet risky, parts of the economy, which appears to have happened.


To summarize, no-one is coming out of this saga looking good.


For sources, see:


https://www.stuff.co.nz/national/politics/300160288/jacinda-ardern-wont-stage-reserve-bank-intervention-as-government-loses-grip-on-house-prices


https://www.stuff.co.nz/national/politics/300159969/rein-in-reserve-bank-and-cool-the-housing-boom-urges-national