Will the RBA target house prices like RBNZ?

Will the RBA target house prices? Sure it will. To push them higher. There is literally zero prospect of it doing anything else at this stage. And a negative probability of the Morrison Government following recent moves by New Zealand’s Ardern Government to force responsibility for house prices onto the RBNZ. The AFR is asking the question will the RBA follow?

The Reserve Bank of Australia will closely watch a move by its cross-Tasman counterpart to explicitly consider house prices in setting New Zealand’s interest rates.

Cheap money around the world is pumping up asset prices, including property in Auckland and, to a lesser extent, places such as Sydney and in regional Australia.

The Ardern Government was partly elected on a platform that included housing affordability.  It has delivered the opposite:

Part of the reason why New Zealand house prices have boomed is because the RBNZ removed loan-to-value ratio (LVR) caps during the onset of the pandemic, only to reverse track now. It also explicitly rejected the Government’s recommendation to restrict the newly created $28 billion Funding for Lending Programme (FLP) to businesses only, thus allowing mortgage lending to run riot, especially with regards to investors (see here).

So, in a typical political fashion, the Ardern Government is now palming the house price problem to the RBNZ. It welcomed the development through gritted teeth:

The Reserve Bank – Te Pūtea Matua welcomes the direction it has received today from the Minister of Finance. The Bank is tasked with considering how it can contribute to the Government’s housing policy objectives, consistent with its financial stability objective of promoting a sound and efficient financial system.

The Minister of Finance has announced he expects the Reserve Bank to have regard to house price sustainability when making its financial stability policy decisions.

“The Minister’s direction is in tune with our recent advice to the Government in which we detailed the many influences on house prices, including the actions of the Reserve Bank,” Reserve Bank Governor Adrian Orr says.

The direction (under section 68B of the Reserve Bank Act) requires the Bank to have regard to the impact of its actions on the Government’s policy of supporting more sustainable house prices, including by dampening investor demand for existing housing stock, which would improve affordability for first-home buyers.

The Monetary Policy Committee’s (MPC) targets meanwhile remain unchanged, that is to maintain stability in consumer price inflation and contribute to maximum sustainable employment.

However, the Bank will be required to outline, amongst other things, the impact of its decisions on the Government’s housing objectives. The replacement MPC remit, which is effective from March 1 2021, requires the Committee to assess the effect of its decisions on the Government’s policy relating to sustainable house prices.

Mr Orr says the adjustments increase the focus on understanding and communicating the impact of the Bank’s decisions on house price sustainability.

“We have a long-standing commitment to transparency about our policy actions and approaches, and this will continue,” Mr Orr says.

The Bank welcomes the Minister’s request for more information and analysis on debt-to-income ratios and interest-only mortgages, and will respond in due course.

Conversely, the Morrison Government was explicitly elected to destroy housing affordability. The RBA is also on record recently underlining it has no problem with rising prices so long as they represent no risk to financial stability. And, right now, despite tearaway mortgage issuance, they do not because mortgage churn (that is, repayments) are so high, holding down credit growth:

Nonetheless, the fear that the RBA might follow the RBNZ into doing the right thing was another excuse for markets to sell Anitpodean bonds yesterday.

Relax, this is Straya! We are the property equivalent of a narco state.

P.S. It is an interesting question whether the ALP would follow NZ if elected.

David Llewellyn-Smith
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