Housing prices are so out of control in New Zealand that the officialdom is way behind the eight ball in trying to contain them. Central London is a bargain compared to Auckland. But making this the central bank’s problem looks to be a way for the New Zealand government to try to escape blame for insane housing prices rather than Doing Something.
A new Financial Times article incorrectly depicts New Zealand’s effort to have its central bank curb housing price increases as novel. It isn’t; Singapore has housing affordability as a key economic goal for many years. The central bank has strict personal borrowing limits and both intervenes to cool the market and jawbones . The Bank of International Settlement even wrote up a little case study..
Home prices have risen steadily in the pandemic, and in 12 months through to the end of January were up 19 per cent in New Zealand. The price of a typical Auckland home soared past $720,000, embarrassing Prime Minister Jacinda Ardern.
A global political celebrity, the liberal Ardern was elected on a promise of affordable housing. Fed up, her government has ordered the central bank to add stabilising home prices to its remit, starting March 1. It is novel and healthy for a politician to recognise the unintended consequences of easy money.
If this idea catches on, it could lead to greater financial and social stability worldwide. Decades of loose central bank policy have done less to generate growth in the real economy than in the financial markets — and those gains benefit mainly the rich.
This is widening wealth inequality, pushing homes beyond reach for the middle class, and not only in New Zealand. Of 502 international cities tracked by Numbeo, a research firm, prices are “unaffordable” (more than three times median family income) in more than 90 per cent. In recent years, the tiny minority of affordable cities has been shrinking toward zero.
While it sounds great that Ardern is making housing price containment a policy priority, prices are so out of control that it’s going to take more than just more stringent bank regulation to tackle the problem, particularly since the central bank was tasked only to achieve “price stability”.
Even though interest rates could in theory also serve as a tool for containing housing prices, they are too blunt an instrument. Way back in the stone ages of 2007, when the Australian housing market had been looking bubble-y for some years (only to continue its march to stratospheric levels), the recently retired head of the Reserve Bank warned that central bankers weren’t well positioned to take on asset bubbles (cynics might say just to stoke them). From the Sydney Morning Herald:
But even if we can identify an emerging bubble, it may still be extremely difficult for a central bank to act against it for two reasons.
First, monetary policy is a very blunt instrument. When interest rates are raised to address an asset price boom in one sector, such as house prices, the whole economy is affected. If confidence is especially high in the booming sector, it may not be much affected at first by the higher interest rates, but the rest of the economy may be.
Second, there is a bigger issue which concerns the mandate that central banks have been given. There is now widespread acceptance that central banks have been delegated the task of preventing a resurgence in inflation, but nowhere, to my knowledge, have they been delegated the task of preventing large rises in asset prices, which many people would view as rises in the community’s wealth. Thus, if they were to take on this additional role, they would face a formidable task in convincing the public of the need.
Even if the central bank was confident that a destabilising bubble was forming, and that its bursting would be extremely damaging, the community would not necessarily know that this was in prospect, and could not know until the whole episode had been allowed to play itself out. If the central bank went ahead and raised interest rates, it would be accused of risking a recession to avoid something that it was worried about, but the community was not. If in the most favourable case, the central bank raised interest rates by a modest amount and prevented the bubble from expanding to a dangerous level, and it did so at a relatively small cost in terms of income and employment growth forgone, would it get any thanks? Almost certainly not…In all probability, the episode would be regarded by the public as an error of monetary policy because what might have happened could never be observed….
The interest rate decision is not the only decision that a central bank has to make ….[T]here are other ways of addressing the problem. Central banks have some credibility and authority, which can be used in a public awareness campaign to make people recognise the risks they are taking in plunging into an overheated market….At the Reserve Bank, we had some success with this approach during the recent house price boom….
But that still leaves the central bank with a very limited armoury with which to fight a potentially dangerous asset price boom – the interest rate, which it does not have a clear mandate to use, and public suasion, which is of limited effectiveness. How would it cope if it faced an asset price boom of the magnitude of those that occurred in the US in the 1920s or Japan in the 1980s? Not very well, I expect, but it would probably be held largely responsible for the distress that accompanied the bubble’s eventual bursting.
Macfarlane didn’t mention bank regulations targeting lending in the bubbly sector, because as best I can tell, that falls under a different regulator, APRA. By contrast, in New Zealand, the Reserve Bank is the lead bank regulator, but a quick scan suggests that lending rules are set by a group of regulators and not just the Reserve Bank. Reader input very much appreciated.
I don’t know the particulars of New Zealand’s regime, but in general, high housing prices are the result of policies meant to encourage home ownership and (supposedly) make it more affordable. As I read it, New Zealand doesn’t provide for the big tax break we have in the US, of making mortgage interest tax deductible. However, from what I can tell, profits from the sale of a primary residence are tax exempt. Reining that in, say limiting the amount that is tax exempt, or alternatively, phasing out the exemption by the gross sales price, would help.
Another prong would be to make renting more attractive. Germany, which encourages renting as a way to keep workers’ cost of living down and hence make labor more affordable, gives renters strong property rights. A common form of contract has an indefinite term (the tenant can stay as long as he likes. Rent increases are restricted. For instance, a landlord can’t make a new tenant pay an unjustified rent increase compared to his predecessor, as in one not the result of an increase in costs.
An additional route is to promote the construction of more rental housing. Financial Times reader View360 argued:
How about supply side measures such as land release & building permits targeting a vacancy rate of 6-8 percent such that landlords are under pressure to offer tenants reasonable rents, which also keeps a lid on prices. In some markets I have looked at whenever vacancy rates have dropped say to 4% prices zoom and when they are say 10 percent they crash. Some amount of vacancy is because landlords aren’t necessarily putting the property on the leasing or sale market because they are not sure if they may need to use it themselves, so 4% vacancy is like full employment!
I would be curious as to whether readers think the New Zealand central bank will be able to get very far. Even though foreign financial experts focuses on Japan’s commercial real estate bubble, residential real estate was also catastrophically expensive before the bust. I had the privilege of seeing a luxury apartment, inside the Yamanote Line, in Hiroo Garden Hills, which had…gasp…green space and trees between the small towers, with three units per floor. The apartment I saw was at most 900 square feet, with three tiny bedrooms, one bathroom, a galley kitchen, and a living/dining room. Its price, in 1989? $5 million. The way the Japanese deal with the crazy prices then was 50 year and greater mortgages. If New Zealand does not tame its housing tiger, ugly accommodations to the nosebleed levels may be coming.