Does the RBNZ risk losing its independence?

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By Leith van Onselen

Yesterday I noted how the Reserve Bank of New Zealand (RBNZ) was soon likely to implement speed limit controls on high loan-to-value (LVR) mortgage lending that would limit growth of 80%-plus LVR mortgages to 12%, significantly below the 30% growth experienced over the past year. I also noted how such meaures would place the RBNZ at odds with both the National Government and the Labour Opposition, who have both lobbied hard to have first home buyers (FHBs) excluded from any LVR speed limit.

Today, the Labour Opposition and the Greens have lambasted the measure and accused the National Government of handing the RBNZ a “loaded gun”. They also vowed to exclude FHBs from any LVR limits in the event that they won office. From

Labour Housing Spokesman Phil Twyford and Finance Spokesman David Parker said [Prime Minister] Key’s handling of the Reserve Bank’s macroprudential policy tool was incompetent and was “set to deny thousands of Kiwis a shot at their first home.”

“John Key has completely mishandled the lending limits plan from the very beginning. His negligence has handed the Reserve Bank a loaded gun of lending limits. He can’t now fake surprise that it is about to pull the trigger,” said Twyford.

“In May National caved in to the pressure, signing a Memorandum of Understanding with the Reserve Bank that would allow it to restrict high value mortgages. As usual John Key took a once-over-lightly approach and didn’t realise the ramifications for first home buyers,” he said.

“It wasn’t until a month later that Mr Key realised what he had done. He then tried to negotiate through the media to put pressure on Reserve Bank Governor Graeme Wheeler. But the primary purpose of the Reserve Bank is to be independent and not listen to political pressure.”
Labour said in government it would give first home buyers an ‘interim exemption from the ‘speed limit’ on high LVR lending while it built 100,000 homes in 10 years and imposed a capital gains tax on second homes and rental properties.
Green Party co-leader Russel Norman said first home buyers should have more lenient LVRs than property investors.

“LVRs should be more lenient for first home buyers than for property investors. It would be unfair to require large deposits from first home buyers. They’re not the ones forcing up houses prices – speculators are,” Norman said.

“It’s very concerning that John Key doesn’t seem to be fighting for first home buyers and is standing by while the Reserve Bank moves to lock many of them out of buying a home. LVRs are a good move but they should be targeted at property investors and speculators, not at families trying to buy a home, and they shouldn’t be the only tool.”

While New Zealand FHBs would undoubtedly bear the brunt of any LVR restrictions, this is because they are the riskiest part of the mortgage market and pose the greatest risk to financial stability, as explained by New Zealand’s Matt Nolan:

When we talk about an issue of “financial stability concerns” we are explicitly saying that individual banks will be taking on too much risk relative to what the “system as a whole” should be taking on. As a result, there is some sort of negative externality from said lending. Guess who the risky borrowers are (in terms of defaulting on a banks loan, especially following a aggregate decline in house prices), are? They the property investors who either aren’t borrowing from the banks or already have significant equity … nope. Are they the people selling their old property and buying a new one with significant equity … nope. Are they the first home buyers, who are leveraging themselves up by putting down tiny deposits and crossing their fingers hoping house price keep going up … bingo!

Any regulation to deal this risk will have a significant impact on highly leveraged lending, which is what first-home buyers are – so the Reserve Bank can ignore their financial stability mandate, or they can respond to this. If you “take out” the change in financing options for first home buyers then you are “taking out” the financial stability gains as well.

The whole macroprudential issue highlights how ultimately the only way to make homes more affordable is to bring land/house prices down significantly by reforming the supply-side of the market, as well as by reducing speculative demand from investors through changing the tax system (e.g. by winding back negative gearing). Simply allowing FHBs to borrow more/less or providing them with grants does nothing to fix the underlying problems.

As an aside, it is somewhat galling to hear the Labour Party voice concern over FHBs when it was they who in government presided over the massive initial run-up in house prices that priced many Kiwi’s out of the market. They had nine years in government to fix the problem, but did absolutely nothing.

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Leith van Onselen


  1. reusachtigeMEMBER

    See, this is why macroprudential is nothing more than a hopeless pipe-dream. Only a massive crash will fix all this.

  2. Macro prudential should not be used to correct land/house policy failings.

    And they certainly should not be administered by a central bank.

    When asset price fever strikes and fools are hungry for credit it is the job of government to manage the situation and while that may include MP the focus should be on the real issue land/house policy reform.

    The central bank should stick to its knitting and hose down excessive growth of debt or inflation with interest rates.

    But then an over blown role for central banks is now just accepted wisdom and the pollies love having someone to blame.

    No wonder Gov Glenn got a pay rise – its called danger money for doing what should be the job of the government.

      • Well if they are rolled into one are they really all that independent anyway?

        I don’t really consider ASIC independent – more a cop on the financial beat.

        Certainly sounds like RBNZ think they are very independent.

        Sounds like NZ will be exploring in some detail the ambiguous concept of ‘independence’ in the context of the concept of ‘responsible government’.

        Hmmm, anyone familiar with NZ constitutional law? I assume it is Westminister cabinet style but without states.

  3. The Patrician

    “(e.g. by winding back negative gearing)”

    I prefer the more upbeat phraseology “(e.g. by focusing NG on new builds)” 🙂

    • Yes – I would go even further.

      “Today the government announced that it is going to support the housing industry by encouraging small investors to invest in new housing and try to get rich quick. This will stimulate the building of new housing and the replacement of existing housing stock that has reached the end of its useful life.

      To ensure that all new investment is directed where it is most needed the government will limit tax deductions on existing premises to those that were acquired by investors prior to the changes that have been announced today.

      The govt encourages would be investors to watch a few “The Block ” reruns and rush down to the nearest builder and slap down a deposit on a new build today.

  4. Forget about the Greens and Labour in NZ-they are dead people walking and haven’t got a bolter’s chance of being in Gov. any time soon.Moreover a lot of this is just pathetic political posturing. All the politicians know that this matter rests within the mandate of the RBNZ not within Parliament. So its easy to score a few points with the punters by saying you oppose the LVRs, knowing your views count for nothing in the end.
    To those who argue supply side-I say-as has the RBNZ- that you are absolutely correct. But its a 5-10 year process and the political class don’t really want to touch it. So the RBNZ is obliged to manage the economy with the tools at its disposal. LVRs are far from a perfect fix but it is beyond argument that it is better than doing nothing. Stop bitching and get in behind a central bank that is prepared to do something- not just stare out the window whilst wringing its hands.

    • Of course I wish them the best of luck.

      At the very least it will answer the question whether macro prudential controls administered by a central bank / regulator are effective (actually limit credit to the market ) and if they are do more harm than good when faced with a foaming real estate market.

      The big risk is that the market drops suddenly and the RBNZ reputation is permanently damaged by being seen to have driven the fall.

      Hopefully, action on the supply side will be faster than the 5-10 years you mentioned (how hard is it to remove restrictions?) and the market cools gradually as buyers understand and observe that rapid capital growth is of historical interest only.

    • (1)”..Greens and Labour in NZ-they are dead people walking and haven’t got a bolter’s chance of being in Gov. any time soon..” So exactly like Labor in Australia 6 weeks ago then ?
      (2)”…supply side… its a 5-10 year process…” Really? Melbourne freed up massive amounts of land in what were the outer suburbs (now just mid way to the edge) in the 60’s, almost at will. Regulations could be changed….tomorrow…and that would be enough to both get things going, and put a shot across the bow of opportunists.
      (3)”.. the RBNZ is obliged to manage the economy..”Yes it is, and it has stared out the window wringing its hands whilst the situation deteriorated before its very eyes, hoping that by some miracle the world healed itself and it could get away with policies in situ.
      (4) “… LVRs are far from a perfect fix but it is beyond argument that it is better than doing nothing….” You may very well think that. But 90% of property holders, you know, those people who vote do have an argument with what’s proposed. The RBNZ may appear to be independent, but who gets to install the next Governor and his crew? The elected Government. The RBNZ has shamefully wasted years of opportunity on a matter that is now likely to cripple the country. IF they act at all it is far too late. Graeme Wheeler, especially, has failed to my eyes woefully. He was advised by Alan Bollard as he left the room, as to what he saw as his own failing – property price containment, and has done nothing except talk and allow the situation to deteriorate. IF anything gets done at all, as I have repeatedly written here over a long time-frame…wake me up….

    • Hugh Pavletich

      terrymcf … very well expressed.

      The pressure from the RBNZ on the Govt to deal with the structural impediments to affordable housing supply is hugely important.

      The focus must be on land supply and infrastructure financing.

      We have huge residential consenting rates per 1000 population within the adjoining Counties (Waimakariri and Selwyn) to Christchurch. Christchurch consenting rates are woeful, but Central Government is currently all over that Council.

      The messages will be getting through to other Local Governments and land-bankers throughout the country as well.

      It is expected the Housing Accords Bill will become law late August and that there will be following that a focus on the “attractor markets” of Auckland, Tauranga, Hamilton and Christchurch by Central Government to get in and sort things out.

      The rest will come in to line pretty smartly.

      Come February next year, in the lead-up to the late 2014 New Zealand election, the current Government simply cannot afford to have housing affordability as a “negative issue”. The Governments actions will need to be seen clearly by that stage as positive by the wider public.

      There is enormous pressure on the New Zealand Government to perform on this issue over coming months.

      Hugh Pavletich

      • You mean this Accord, Hugh ? ” Treasury advised the Government to change wording in the legislation ….it would instead be merely required to negotiate in “good faith”, which would be a “lower bar” for the Government.” As I suggest below, the property lobby will dilute the Government’s endeavours at every turn. You, of all people, know that!

      • Hugh Pavletich

        Janet … what politicians are particularly interested in is public opinion and if lobbyists (including of course those from the property sector) views differ, it is tough luck for the latter. Note the 3 December TV One Colmar Brunton poll …

        Govt should act to lower house prices – poll – National News | TVNZ

        I don’t think Mayor Bob Parker and his sidekick Chief Executive Tony Marryatt of the Christchurch Council are feeling particularly powerful or influential at the moment … do you ? Or the bureaucrats around the place. I covered this within a New Zealand National Business Review Opinion over the weekend …

        Christchurch: the political shambles | The National Business Review

        I’m pretty familiar with property industry politics in New Zealand. The influence of the industry and professional groups is grossly over-rated in my view.

        Hugh Pavletich

        Apologies for the hyperlinks being in the wrong slots …

    • disco stuMEMBER

      Well if the political class are going to do nothing about the supply issues, and they’re planning on leaving it all up to the RBNZ then frankly the better choice is to remove all lending constraints, both on domestic borrowers and on the banks offshore funding, and let the chips fall where they may.

      They could then be free to gorge themselves to death all the faster, and hasten the inevitable destruction in a far quicker time. It would also consequently bring about a far quicker and fairer reset and recovery, such that those who were responsible for it would still be capable of sharing some of the pain.

      The ZIRP policy with macroprudential controls is going to string any reset out to eternity ensuring the younger people of NZ (and Aust) are forced to bare the majority of the pain and of pay back. Young people have their entire lives to rebuild after a crash, what they don’t have is another 20 years to wait to try to save up to buy a house and start a family.

      The biggest losers in this approach would be the boomers and co-opted GenX’ers who couldn’t wait. Hence I expect the self interest that has got us where we are today, will continue for at least the foreseeable future.

  5. The sad part is that the politicians who engineering these housing bubbles will get away completely scott-free. At least bankers are hated and blamed before being allowed to run away with their ill-gotten gains. Politicians get away without any blame even.

    In reality they deserve the most blame. You defraud a few people, you go to jail. You destroy a whole country through obviously destructive policies, nothing.. IMHO, they should hang but that’s just me…

  6. I find it ironic that by far the most blame for the “US Housing Bubble” on the part of the ignorant mainstream commentariat still rests with the US Federal Reserve and Greenspan’s easy money policies; plus “loose credit” and lack of oversight of mortgage lending.

    Then the little RBNZ years later, acts in ways that should be regarded as the model of monetary responsibility, and what thanks do they get?

    Actually, this is about the best thing that could be done to stop the bubble growing while the government is getting around to addressing the problem properly via land supply issues. Potential first home buyers will look back on “being shut out of the market” in 2013, with relief.

    The real problems with the shutting of young people out of the housing market began in the early 2000’s and was never anything to do with “tough credit”.

    It cannot be repeated too often: “supply” determines what percentage of people will be “priced out”. The ease of credit merely determines house prices and the level of debt taken on by those who “succeed” in “not being priced out”. They are of course in a state of high risk for most of the term of the mortgage, unlike FHB’s in markets where the supply is elastic and prices affordable – whose risk steadily reduces as the already-lower principal is paid down far faster.

    • “… the little RBNZ years later, acts…” To take you out of context, Phil…it’s the years of delay that’s the problem now. You and I both know that the RBNZ ‘had it in their hands’ back when Dr. Bollard ramped the OCR up and squeezed the first excess of +10% out of the market. But they let the genie out of the bottle when it fell over with the GFC and the Earthquake, and the property lobby used those years and swore they’d never get put back in that bottle again. Those that have the ultimate power to meaningfully change the situation, the Government, won’t. The RBNZ is hostage to that situation (as Leith asks in the title of this piece) and whatever moves the RBNZ now makes, the political classes under the control of a wiser property lobby, will act to make sure that continues.

      • Absolutely agree that the delay in addressing this issue is fatal, not just in NZ, but in countries with similar as-yet unburst house price bubbles. This includes Australia, Canada, Sweden, and France.

        But central bankers have been painfully slow to start to demand and use macroprudential tools beyond a base interest rate (OCR). It always was the height of stupidity to think interest rates could be used to contain a house price bubble (based as it was on inelastic supply of land). Interest rates high enough to contain the bubble, kills the productive economy. Let the brakes off because the productive economy is dying, and off the bubble goes again with a hiss and a roar.

        Reusachtige’s first comment on this thread is correct. The restoration of affordability will involve a “crash” now, and nothing else. All the correct policy solutions must be put in place AFTER THE CRASH, to make sure the bubble madness does not happen again. They have failed to do this in the USA and their bubble markets are going crazy again right now.

        (Last year) “….prices rose 26 percent in Nevada…… Nevada was followed by California (20.2 percent), Arizona (16.9 percent), Hawaii (16.1 percent) and Oregon (15.5 percent)…..

        DUH! DUH! DUH!

        See further comment later on the thread – it’s getting too skinny here.

  7. As I have said before. The shortage determines how many families miss-out. Credit determines at what price they miss-out.
    Limiting credit is good. Solving the shortage is better.

  8. Hugh Pavletich

    It is a great shame New Zealand Prime Minister John Key failed following the 2008 election in not dealing with this issue as promised in the lead-up to it.

    I explained this last December with …

    Housing: Mr Key – Get on the Programme | Scoop News

    So the response we have now from New Zealand’s Reserve Bank, is really a result of John Key (doing a John Howard) in failing to do what he had promised out of the 2008 election.

    Weep as you read the nonsense Mr Key gave to the Wall Street Journal early 2009 …

    New Zealand’s Prime Minister John Key Takes a Supply-Side Approach to the Global Recession –

    Hugh Pavletich

  9. Over the decades that growth containment urban planning has applied in the UK, the price of land per square foot relative to incomes tends to have increased, so that the longer reform is delayed, the more fraught with downside volatility risk it is. There are possibly trillions of pounds sterling of “equity” riding on the price of urban land per square foot in the UK – something not immediately evident when using “median multiples” to compare housing markets.

    UK median multiples at around 6 to 9, versus 3 in affordable US cities, hides the fact that the price of land per square foot is literally dozens of times higher in the UK cities – because the amount of land consumed per household is so much less. The space per household has been sacrificed and sacrificed and sacrificed for decades as the price of land per square foot has risen. The house price median multiple of six to nine in UK cities, is for “housing” on something like 1/12 of an acre or less, per household on average.

    If “the right to build” was restored to its pre-1947 (“Town and Country Planning Act”) condition in the UK, this would mean such a crash in the price of land per square foot, that new housing at three times household income would become available on sections several times the size of the status quo ones. And the new housing would be much higher quality.
    So the millions of crummy dog box “houses” would not just fall from a median multiple of 6 to 3; they would go way below that. You could knock most of them down; they are worth nothing as structures; and the 1/20 to 1/10 of an acre of land underneath might be left at a value of 10,000 pounds or less instead of the current 150,000 pounds plus.

    The UK economy is toast. The high urban land prices are an economy-killer in themselves anyway (as I have written in NBR before). The longer other countries persists in the same sort of policies on urban planning, the further down this path to urban-economic Mexican standoff they go.

    It is of the utmost urgency that other countries reform while the finance system equity that stands to be wiped out is at lower levels. The excessive mortgage loads get larger and larger to pay for less and less actual space per person, the longer this mania is persisted with – and work out how much bigger the equity wipeout will be when reform means people can get not just less mortgage load, but more space for it. The pollies have to be made to understand that the sooner the better, for reform.

    The Poms literally can’t do it now. I actually am aware of astute hard-leftists who see the opportunity for a new form of Communism in land “ownership” as getting steadily closer to the only “solution”. This is Lenin’s classic “capitalists will sell you the rope you use to hang them” thesis. Keep hiking land rent and debt, and this is like a gradual march towards an eventual radical leftist “solution”, possibly after total economic collapse.