Reserve bank and MPs clash over high house prices
What is the price of a sustainable home anyway? That’s the question that was posed to Reserve Bank governor Adrian Orr and his lieutenants at the bank during a Zoom Call select committee on Thursday morning.
The meeting was at times heated, with Green MP Chlöe Swarbrick and Reserve Bank Governor Adrian Orr vying for the role of the Bank in the current housing crisis.
The governor was appearing after Wednesday’s May Monetary Policy Statement (MPS), which predicted, among other things, that the official treasury rate would start rising from its record low of 0.25 in the second half of next year , and that house price growth would freeze. , from the middle of this year.
It is normal for the Governor to appear before Parliament’s powerful Finance and Expenditure Selection Committee to answer questions about his latest PSM, but this is the first time the Governor has responded to an PSM drafted since the Minister’s letter. Finance Grant Robertson at the Bank. in February by asking him to take the sustainability of house prices into account when making monetary policy decisions (the Bank appeared before the select committee in the meantime).
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Housing prices were obviously taken into account in the declaration. The Bank has included four pages of modeling and economic thinking on house prices and monetary policy. These pages look at the causes of high house prices in New Zealand: primarily a lack of supply through planning regulations and a growing population.
However, the bank also blamed it on its own feet, noting that low interest rates fueled house price growth.
The Bank’s statement said its “working definition” of a sustainable house price “is the level to which the price should move, given the outlook for the factors that determine housing supply and demand.” .
Orr’s oral remarks to the committee discussed this as well as the “fair value” of a home, although what those phrases meant were sometimes unclear.
Green MP Chlöe Swarbrick asked Orr for clarification – there was a lot of talk about sustainability and fair value, but it wasn’t really clear what those two things meant.
“Can you define what fair value is?” Swarbrick asked Orr.
Orr joked that he had been “very naughty” in shifting the language from “fair value” to “sustainable” when in fact the Bank was using them both interchangeably.
“We see them as the same in our definition,” he said.
“What we’re talking about in terms of sustainable housing prices is where housing prices are expected to stabilize over the medium term based on fundamentals of supply and demand,” Orr said, repeating the vision. Bank on the supply and demand factors of high house prices.
Swarbrick said if the bank simply looked at supply and demand drivers to measure sustainability, prices could continue to rise and still be seen as sustainable.
“Under this approach, house prices could go up a lot and still be seen as sustainable,” said Swarbrick, asking if Orr was really fulfilling the Bank’s new mandate to take into account government housing policy. when considering the housing market.
Orr rebuffed this, alleging that Swarbrick had misinterpreted the Bank’s new mandate.
“I think you misinterpreted what we said. We can look at the current price – the current price doesn’t mean it’s sustainable, ”he said.
He then explained what the prices of sustainable housing mean for the Bank. The answer was that Orr wanted people buying homes to balance that choice with buying other types of assets.
Orr defined sustainable as “where the choice between owning a house and renting a house is a balanced choice and the choice between investing in housing and all other assets is a balanced choice based on risk-adjusted returns”.
He said the current market is not reaching that threshold – “the current price, the current growth rates that we have seen in house prices are not sustainable, so we see price growth coming to an end.”
Swarbrick asked why Orr wasn’t more specific and set “a level of expectation on what sustainable housing prices might be.”
“I note the last time we had RBNZ [Reserve Bank of New Zealand] before us there was a refusal even to commit to what might be, for example, a relationship between income and house prices, ”Swarbick said.
Orr seemed indignant at this remark.
“I’m disappointed you felt this,” he said.
“We’ve tried to engage very clearly with you,” Orr said, pointing to two major reports the Bank had recently released.
Questions have been transferred from Swarbrick to other members. Nicola Willis, of National, asked how the Bank could be confident in its forecast that house price growth would stop, especially when prices had only risen in recent months.
“Asset prices, by definition, are notoriously difficult to predict,” Orr said.
However, he noted that the bank was able to look through short-term fluctuations in house prices, which were difficult to model, to see the medium- and long-term fair value of homes. All the pressure on the long-term fair value of homes was down, meaning the bank sees less chance of continuing to raise prices out of control.
The meeting ended with another exchange between Orr and Swarbrick, which touched on a recent article published by the bank on the effects its cash rate decisions and digital currency printing have had on inequality in New Brunswick. Zealand.
The paper cast doubt on claims that money printing worsened inequality, but Swarbrick noted that it focused primarily on reviewing the international literature on monetary policy and inequality, and not enough on the real impact in this country.
“Do you think it is important to focus on the real impact on the ground of monetary policy in Aotearoa, New Zealand?” Swarbrick asked.
Orr said he wanted to continue working on understanding the effects of the bank’s monetary stimulus, primarily coin printing on inequality.
“It’s a great area that we want to be the world leader in understanding,” Orr said.
But he backed the report’s findings, saying the Bank wanted to tell its side of the story – that part of its monetary policy strategy “was about keeping people in jobs.”
Essentially, high asset prices encouraged people to spend, which kept unemployment low, even though many of these people could not afford housing.
Orr ended the committee meeting with a warning, however, that the low interest rates the bank maintained would not last forever, posing big risks for heavily indebted homeowners.
“We are confident that the banks can absorb the risks sitting out there,” Orr said.
“We are less convinced that all households are aware of the influence they currently have and the capacity to be at work or unemployed. What is their capacity to handle this? “