How RBNZ ignited the property market

New evidence has arisen suggesting that the Reserve Bank of New Zealand (RBNZ) has played a direct role in inflating New Zealand’s housing market, which is experiencing its strongest price growth since 2004.

Over the weekend, Interest.co.nz revealed that the Treasury department recommended finance minister Grant Robertson advise the RBNZ to restrict the newly created $28 billion Funding for Lending Programme (FLP) to businesses in order to stimulate productive activity.

The RBNZ refused to introduce such conditions and instead began providing cheap loans to banks, in turn fueling mortgage demand and rapid house price growth:

“The Bank has options to design the FLP in a way that helps ensure that: lenders’ lower funding costs are passed on to their customers; new lending is allocated to productive parts of the economy; and financial stability risks are managed” [A document released in August to interest.co.nz under the Official Information Act shows]…

Robertson in late-August publicly signalled his preference for the RBNZ to put conditions on the FLP, recognising the concern funding could flow straight into the housing market.

National’s shadow treasurer Andrew Bayly in November also openly called for the RBNZ to put conditions on the FLP…

The RBNZ last year explained putting conditions on the FLP could constrain its uptake.

This isn’t the only ‘own goal’ by the RBNZ with respect to New Zealand’s housing market.

In April 2020, the RBNZ removed loan-to-value (LVR) mortgage restrictions to stimulate the economy amid COVID-19 lockdowns, which in the words of the RBNZ was followed with “a rapid acceleration in the housing market, with new records being set for the national median price, and new mortgage lending continuing at a strong pace”.

Accordingly, the RBNZ performed a stunning U-turn a fortnight ago, reintroducing LVR mortgage restrictions from March 2021 in a desperate bid to cool the housing market.

“We are now concerned about the risk a sharp correction in the housing market poses for financial stability. There is evidence of a speculative dynamic emerging with many buyers becoming highly leveraged.

“A growing number of highly indebted borrowers, especially investors, are now financially vulnerable to house price corrections and disruptions to their ability to service the debt. Highly leveraged property owners, in particular investors, are more prone to rapid ‘fire sales’ that potentially amplify any downturn”.

If the RBNZ could have a do-over, no doubt it would never have removed the LVR restrictions in the first place and probably would also have restricted the FLP to businesses only.

To be fair, this observation comes with the benefit of 20-20 hindsight. Almost everyone (including me) believed the COVID-19 downturn would be far more economically damaging and would negatively impact the property market. As such, the RBNZ can be forgiven for initially removing LVR restrictions.

The same cannot be said for ignoring Treasury’s advice on the FLP, which came four months later when the economy and housing market were already rebounding strongly.

Unconventional Economist
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