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  • Robert MacCulloch

Slippery Politics from the Reserve Bank

When a Central Bank starts writing and talking like politicians, using tricky, if not downright misleading half-truths in their press releases, it verges on the disturbing. Read these lines in the RBNZ's 6th May "plain language summary" regards why it is "concerned about rising house prices" in NZ and what is to blame:


"Resilient household incomes, bolstered by wage subsidies, strong migration levels prior to the border closure, and supply constraints – including land use restrictions and barriers to the supply of infrastructure have also contributed to the recent surge in demand".


First, this sentence should be retracted by the RBNZ, together with an apology for failing 101 economics. It says that supply problems have led to a surge in demand. Supply problems have led to a restriction of supply and increase in prices - the idea they have led to an increase in demand is a stretch. Is the RBNZ confused about supply and demand and how prices are set? We knew they were weak on economics, but this weak? If this is the "plain language" version for us, the ordinary folk, I'd like to see the more technical version.


Second, the statement plays down the effect of the RBNZ's own $100 billion "Quantitative Easing" program, making no explicit reference to it. Border closures happened over one year ago, yet house prices have since gone through the roof, coinciding with that program. The Bank adds: "The cost of servicing a new mortgage compared to renting remains relatively low ... but, as with the levels of many global asset prices & the pace of their recent rise, the sustainability of house prices in NZ has been called into question ... long-term interest rates have been trending down for decades & the global monetary policy response to COVID-19 brought them even lower".


Hang on a second. They're blaming the "global policy response" to the virus and argue that asset prices are high (and long-term rates are low) practically everywhere!? But it makes little sense to blame global factors for high house prices in NZ, since a vast number of countries which have also experienced a downward drift in long-run rates have not had the kind of affordability crisis that we suffer from here. The RBNZ's unprecedented money-printing QE experiment has nothing to do with these long-run trends in interest rates.


Third, the reason why the RBNZ says it's currently "concerned" with high house prices - namely due to "vulnerabilities that this poses to the economy’s financial stability" - is disingenuous. The reason for the present concern is that the Bank's remit was changed by the Minister of Finance a couple of months ago due to vulnerabilities in the government's popularity caused by unaffordable housing, whereby many low income folks have been priced out of the market. Effective on 1 March, the Bank's remit was altered to require it to “assess the effect of its monetary policy decisions on the Government’s policy” which is to "support more sustainable house prices, including by dampening investor demand for existing housing stock, which would improve affordability for first-home buyers”.


Economists have learnt over many centuries that playing with words and not being transparent may lead to political success but typically comes at a terrible price in relation to the smooth functioning of the economy.


For sources, see:


https://www.rbnz.govt.nz/-/media/ReserveBank/Files/Publications/Factsheets%20and%20Guides/guide-houseprice-sustainability.pdf?la=en&revision=d0fddb0b-883a-4643-b5f2-538c0066f586


https://www.interest.co.nz/news/109234/robertson-requires-rbnz-consider-house-prices-when-setting-monetary-policy-and-through