English welcomes Reserve Bank doing his job for him

Written By: - Date published: 9:03 am, May 14th, 2015 - 54 comments
Categories: bill english, housing, leadership - Tags: , , , ,

Why is it left to the Reserve Bank to take (poorly targeted, belated) action on the property price bubble? Yesterday’s press release from The Greens was spot on:

Reserve Bank forced to do AWOL Govt’s job on housing

The Reserve Bank is being forced into acting on the Auckland housing crisis because the Government is refusing to, the Green Party said today.

“It’s becoming increasingly obvious that it’s the Reserve Bank, and not John Key and his Government, who has the best interests of Aucklanders at heart when it comes to home ownership,” Green Party Co-leader Dr Russel Norman said today.

“This Government refuses to do anything meaningful to solve the Auckland housing crisis, so the Reserve Bank has to step in and try to do the Government’s job with the limited tools available to the Bank.

“Last month, the Reserve Bank called on the Government to close the tax loopholes that allow property speculators to run rampant in Auckland – that is, introduce a capital gains tax on investment property. The Government rejected those calls.

“Today, the Reserve Bank is taking action to try to curb rampant property speculation in Auckland, by restricting finance to investment property buyers in Auckland. The Government must follow suit by using the tools at its disposal.

Today Bill English welcomed the Reserve Bank’s move. Why isn’t he leading the way? Why isn’t the government taking action? The RB has even told them how.

It’s true – this government is recklessly complacent.

54 comments on “English welcomes Reserve Bank doing his job for him”

  1. DH 1

    You seem to misunderstand the role of the RBNZ. They’re not doing this to help anyone, they’re merely protecting the banking industry from itself.

    This will result in a further rise in rents and more misery for low income Aucklanders. Property investors require a return of x%. That return can come from capital gain or rent, or both. When the capital gain stops they put rents up to compensate for the inadequate return.

    People trying to save for a deposit have to save not just the deposit but also the inflation. Aucklanders who started saving five years ago now need more than three times as much as when they started, after the rampant housing inflation and doubling of the deposit via LVR. Now they’re going to face rent increases which will come out of their meagre savings, their chances of buying a home reducing even further.

    You can’t address housing inflation without also addressing rent inflation. They’re tied to each other. The RBNZ are just ensuring that investors consolidate their existing gains and protect the banks from a crash, that’s all they’re doing.

    • Lanthanide 1.1

      What a strange comment.

      1. Investors might like to get a return of x%, whether that be via capital gains or rental. But like everything in life, there is no guarantee they will get that return, via either capital gains or rental. If the capital gains go down, they might like to increase rents to try and chase that x%, and they can try.

      2. You can’t charge higher rents than tenants can actually pay. If you put the rent up too high, you’ll end up with empty houses, or demanding tenants that feel they deserve better service based on the rent they’re paying – it can be a false economy.

      3. Assuming capital gains stop growing, or even reverse to some extent, putting the investor underwater, as long as they can keep up with the mortgage payments they’re not in too bad a position. The real kicker is when interest rates go up, and therefore the mortgage payments go up; but it looks like in the short-to-medium term that rates are more likely to go down than they are up, so that is a nice insulating factor (and likely what has been driving a lot of the increase in price in the first place).

      4. If prices go down, and rents can’t be raised, many investors will simply have to take a loss. So much for “housing always goes up” and “this time it’s different”.

      5. When the current National government removed the ability to claim for building depreciation, there were dire warnings that rents would rise as a result. The data shows that there was no such general rent rise. Why should there be a rent rise this time?

      • alwyn 1.1.1

        The first part of his comment is absolutely true.

        The RBNZ aren’t, and aren’t meant to be, concerned with the actual level of house prices or what it means to the people who buy or rent houses in Auckland. Their job is to prevent the banking system collapsing if there is a massive drop in house values in Auckland. If that happened, and the banks had to take massive losses from defaulting borrowers the New Zealand economy would be trashed. They are only worried about whether the prices are sustainable.

        This is the reason for the 30%. The RBNZ doesn’t have to worry about investors going bankrupt, and not repaying their loans to the banks, unless the house prices were to crash by more than 30%.

        It doesn’t actually matter for investors who borrow their money from overseas banks who don’t operate in New Zealand. If they were to go bust it won’t affect the people of New Zealand.

        • Lanthanide 1.1.1.1

          I agree completely with you, and with his first point – which is why I didn’t actually respond to that first point.

          It’s just the rest of it was a load of drivel, that somehow housing investors have a divine right to a return on their investment.

        • Draco T Bastard 1.1.1.2

          If that happened, and the banks had to take massive losses from defaulting borrowers the New Zealand economy would be trashed.

          No, the banks would be trashed. The economy would probably be better off.

      • DH 1.1.2

        What’s strange about it?

        Wake up mate, people don’t have endless choices here. We can either rent or we can buy. There’s no other choices. If landlords put up rents what do you think people are going to do? Move? To where? Buy a house? How?

        Certainly rents are related to how much people can pay. But so is everything in life and housing is a necessity so an increase in rents will be paid by spending less on other things.

        And my point was that stopping capital gain won’t put investors under water. Rents provide the cashflow and rent increases consolidate and/or provide the capital gain. They’ll put rents up to prevent themselves from going under water.

        There’s nothing mysterious about the property investor model. It works on the simple economic fact that there is no inflation on money. Buy a property with borrowed money, let inflation take rents up, and eventually the cashflow turns positive. Rents go up while your own borrowing stays the same. Do the maths.

        • Lanthanide 1.1.2.1

          If your thesis is correct, why is it that the average rental in Auckland is not $1,000 a week?

          It’s so easy to put rents up, eh?

          I already provided you a recent and relevant case where landlords said they’d put rents up across the board, and yet rents didn’t go up.

          • Sabine 1.1.2.1.1

            give it another year. we are now at an average rent of 550+ per week, and that is in the suburbs.

            but it’s all cool. those with access to easy credit must be working harder and smarter and having less debt than those moochers and they must be deserving of that soon to come 1000$ per week.

            the funny thing is, i have lived through times like this.

            In Germany after 1989 – the wall fell, the boarders opened and we have had 11 Million East Germans that moved.
            I lived for two years in a Caravan, as we, my partner an Officer in the German Army, and me a PA for a Shell Executive could not afford rent on our combined incomes.

          • DH 1.1.2.1.2

            And if you’d ever paid attention to the investment market you’d know that rents lag asset prices in a rising market.

            Housing goes in cycles, it’s always gone in cycles. In times of housing inflation there’s little need to increase rents because the capital gain is providing the required return for existing investors.

            It’s when housing inflation stops that you tend to see large rent increases. Happened in 2008/09, will happen again when this round of inflation slows or stops.

            • Lanthanide 1.1.2.1.2.1

              Again, assuming that there are people willing and able to pay the rent. Can’t get blood out of a stone.

              • DH

                “Can’t get blood out of a stone.”

                Yeah, well, the day might come when that occurs but it’s not there yet. People seem to find the means to pay the rising rents, don’t ask me how they do it they just do. I guess when you don’t have much of a choice you find a way.

            • Lanthanide 1.1.2.1.2.2

              Anyway, if you’re saying that rent rises go in cycles and it’s inevitable, then the RBNZ actions haven’t really changed anything, have they? Except moved the date forward.

              If we can assume that rent rises are proportional to the forgone capital gain, then it would seem if the cycle prematurely ends when the average price of a house is $800k, then the subsequent rent rises would be less than if the cycle continued and didn’t end until the average price of a house was $1.2M.

              So if rent rises truly are inevitable, if the RBNZ has helped to accelerate the next part of the cycle, it would seem that rent rises will be less than they otherwise would be. So the RBNZ should be congratulated, not castigated.

              • DH

                Well they’re not inevitable. If you follow the concept of lag then you’d understand that rents will rise to account for past asset inflation. If investors are prevented by Govt from increasing rents then the price of houses would have to fall back to where the lag begins wouldn’t they?

                And Govt could very easily limit rent increases. They could tie them to capital gain and tax investors on gains every time they increase rents. We know they are using capital gains to increase rents so there’s no reason why they shouldn’t be taxed on their gains is there?

                If investors had to borrow against their capital gain to pay CGT then they’d have less equity to borrow against to invest in more houses. Win/win.

                So it’s not as if the Govt can’t do anything about it. It’s that they won’t.

        • Draco T Bastard 1.1.2.2

          What you’ve done here is explain, in great detail, why rental properties should not be privately owned.

          • Liberal Realist 1.1.2.2.1

            100% Agree.

            Rental housing is totally unproductive, it produces nothing. Just profits for the banks which are exported overseas.

            There should be enough social housing to meet the needs of the population present and future, funded by the state, rents determined by a percentage of income model that’s reasonable & fair. Housing is a human right after all.

            One of the rorts often forgotten is the ‘accommodation supplement’ (possibly totaling 2.2B / PA by 2016) which is really a landlord (mortgage) + employer subsidy (wages).

      • Sabine 1.1.3

        your number two point is rubbish, excuse my english.

        Rents are to cover mortgages not to cover x amount of square meter per dollar.

        i.e. this is why in Germany I can rent a one bedroom, kitchen and civilised bathroom for 900$ a month (about 45 – 54 square meter) in the middle of a decent sized town, but not in NZ.

        In Auckland you can’t rent a one bedroom, shared kitchen with a showerhead, non leaking, non drafty, and non bug infested for less then 1500$ per month. They usually call this a room in a shared flat with 6 others and yes, room rents have gone up to 350$ per week.

        No one in NZ charges rent, they all charge the Mortgage and rates on to their tenants, cause profit needs to be made from minute number one of the purchase.

        Hence why people sleep in tents, in rent a room containers, in caravans, or 10 to a three bedroom house.
        I have a few young ones that would like to get married and life in a small flat. Ain’t no one building small flats for a started, and even with both working they can’t make it work, lest they would like to eat, and have electricity, and a phone, and a car and maybe go to the dentist every three years.

        New Zealand is on verge of becoming a third world country, a lot for the very rich and nothing much for the rest,….the middle having gone to either very rich (a few) or very poor (quite a few more).

        rip, NZ, it was nice while it worked.

        • Hanswurst 1.1.3.1

          in Germany I can rent a one bedroom, kitchen and civilised bathroom for 900$ a month (about 45 – 54 square meter) in the middle of a decent sized town […]

          Less, even, if you shop around a bit.

    • Jones 1.2

      “[The RBNZ are] merely protecting the banking industry from itself.”

      Because the banks are debt junkies. It will not protect the banks from a crash. All the RBNZ can do is try and send a message.

      • Lanthanide 1.2.1

        “All the RBNZ can do is try and send a message.”

        Actually they can do a lot more. Like take banking licenses away.

        They’re just exercising the minimum amount of power they think they need to get the outcomes they want. Whether or not the outcomes they desire are sufficient is a separate question.

        • Jones 1.2.1.1

          “Like take banking licenses away”

          Aye… but I’d like to see them try… there would be re-legislation of the RBNZ Act by lunchtime. I believe the ANZ and ASB (CBA) are the most exposed banks in NZ to mortgage lending… two very big players in Australia/NZ banking system. The Government would get told.

  2. Colonial Rawshark 2

    National’s move is the smart one, in terms of the politics of the Auckland property investment class. The RBNZ move is (nominally) independent of the government. Therefore English and National will effectively deflect “blame” for the move putting the brakes on to the Auckland property investment market towards the RBNZ.

    • Draco T Bastard 2.1

      Yep. This government won’t do anything that will put them on the wrong side of the speculators. Probably because they’re the speculators.

  3. Draco T Bastard 3

    It’s true – this government is recklessly complacent.

    No they’re not. They seem to be working hard to crash the economy so that it can be sold to offshore interests ASAP turning everyone else into serfs for the new corporate owners.

    • Jones 3.1

      The crash is already baked in… it has been since the response to the GFC in 2008. What the Government are doing is helping their constituents extract as much wealth as they can from the NZ economy before it implodes.

    • Colonial Rawshark 3.2

      The National Govt is certainly not complacent in helping their property investor mates (including their own MPs) get richer day by day. Quite the opposite in fact.

  4. Steve Alfreds 4

    The real question is will it do enough to suppress the housing market when so much of it is being driven by the level of immigration and the hot money coming in from China and Asia. There’s so much coming into the country from offshore banks which won’t be affected by the RBNZ’s actions. The government has to address the way it deals with immigration, such as sending the people coming into NZ to different regions, or reducing the overall numbers. This could be coupled with restrictions on overseas property speculators. The RBNZ is doing this as a token gesture so it is seen to be doing something. But I’d love to be a fly on the wall at the meetings between the RBNZ and the government. Tensions there. The RBNZ has to be seen to be independent and have some integrity, while the government’s hands-off approach is making it look stupid.

  5. Andrew 5

    So house prices in NZ more than double between 2001 and 2008 and there is no problem:

    PDF Link

    Now prices are shooting up in Auckland, to insane levels in my view, and pretty static everywhere else and the sky is falling?

    The seeds of this issue go back 20 years.

    • Draco T Bastard 5.1

      Actually, the seeds of this issue go back to 1984 and the introduction of neo-liberalism to NZ by the 4th Labour government.

      • Jones 5.1.1

        I think they go back to 1971 when the world moved off the gold standard and across to fiat currencies.

        • alwyn 5.1.1.1

          The world went of the Gold Standard long before 1971.
          The Gold Standard ended as soon as a person holding currency (read Bank notes) couldn’t go into the issuer of the notes and demand gold, at a fixed, known exchange rate, AND receive it.
          That possibility ended in most European countries in 1931 and in the USA in 1934. It was in 1971 that Nixon refused to allow other Central Banks to demand gold from the US.
          However the Gold Standard was already dead. Thank God for small mercies.

          • Draco T Bastard 5.1.1.1.1

            It was in 1971 that Nixon refused to allow other Central Banks to demand gold from the US.

            And when Nixon did that is when the rest of the world should have dropped the US$ as the Reserve Currency. It was, after all, the US unilaterally dropping its responsibilities under the Bretton Woods agreement.

            Under a floating currency system there shouldn’t be a Reserve Currency.

            However the Gold Standard was already dead.

            And it should have died in the 19th century.

            • alwyn 5.1.1.1.1.1

              You sound like a William Jennings Bryan fan.

              “: You shall not press down upon the brow of labor this crown of thorns, you shall not crucify mankind upon a cross of gold.”

              It sounds great if you don’t know that Bryan was a representative of a state that was a major producer of silver and was looking for a high priced market for his supporters’ production of silver.

              I am intrigued by the idea that “Under a floating currency system there shouldn’t be a Reserve Currency.”
              I don’t see what that is really suggesting or why it follows from floating exchange rates.

              • Draco T Bastard

                It sounds great if you don’t know that Bryan was a representative of a state that was a major producer of silver and was looking for a high priced market for his supporters’ production of silver.

                And I’d say the same thing about a Silver Standard as well – bloody useless.

                I am intrigued by the idea that “Under a floating currency system there shouldn’t be a Reserve Currency.”
                I don’t see what that is really suggesting or why it follows from floating exchange rates.

                The reason why we have the US$ as the Reserve Currency is because the US$ was going to be convertible to gold (Sure, nation to nation rather than personally). By dropping that aspect of the US$ in ’71 as Nixon did it dropped the ability to be the reserve because it no longer related to gold at a fixed price.

                And it follows from floating currencies because the exchange rate between two countries is, hypothetically, set by the trade difference between those two countries rather than their fixed exchange rate to the US$ as was set under the Bretton Woods agreement.

                In fact, once the US dropped the Gold Standard in ’71 the Bretton Woods agreement essentially came to an end.

  6. Steve Alfreds 6

    It certainly hasn’t happened overnight. But now’s the time for government to act, instead of leaving it to the wonders of the free market (joke). People have short memories in this country. Remember this from stuff in 2009.
    http://www.stuff.co.nz/auckland/local-news/western-leader/2291062/PM-vetoes-Hobsonville-state-homes

    No state houses will be built on the old Hobsonville airbase.
    Earthworks at the site are due to start in October and construction of 660 houses should take place from early 2010.
    But plans by the previous government to include 500 state rental houses among them have been scrapped.
    “The prime minister has made the decision that there won’t be any state rental housing,” Hobsonville Land Company chief executive Sean Bignell says.
    The development is expected to include houses for first home buyers.
    Details have yet to be finalised but Mr Bignell says they’ll be given a choice of sections to build their homes within set guidelines.
    He says the government is expected to defer the purchase of the sections for up to 10 years.
    “It’s only at a preliminary development stage at this time,” he says.
    Housing New Zealand first announced its interest in the 167ha site in 2002.
    It now owns 111ha.
    Its subsidiary, the Hobsonville Land Company, was formed in 2005 to oversee development.
    Plans for the provision of some state houses were opposed by Prime Minister John Key when he was campaigning for the last general election.
    More than 770 members of the Hobsonville-West Harbour Ratepayers Association also signed a petition opposing the plan.

  7. plumington 7

    One reason housing in NZ is expensive because of the monopoly of building products, real wages haven’t gone up
    What building company and its subsidiaries owns building products (from steel, concrete timber through to even electrical to plumbing ) and are part owned by the government and all the big business boys
    Follow the money trail

    • Tracey 7.1

      When it comes to housing/property in NZ, all roads lead to Fletchers… always have and always will it seems… They’re developers now.

    • Jones 7.2

      Others include the type of homes that are built (boutique spec homes each on their own section) and the lack of alternative investments to real estate – which I maintain, aside from any capital gain, isn’t strictly an investment as it requires continual investment to keep it going.

  8. Tracey 8

    It’s clever actually. The NACT party gets to keep its constituency by pandering to their wealth promotion scheme no matter the harm to society as a whole, while the RB tries to fix it.

    • Sabine 8.1

      I don’t think the RB tries to fix anything. I think they are just trying to protect some of the banks from the eventual crash.

      Not one to give a fuck in general because effectively I am sorted – have a place to go to on the country side when shit hits the fan, i have no debt, i own my bike, and even my business is loan and lease free. I can move anytime it gets to shitty.

      But, and as always what goes up must come down, unless we are willing to continue selling to foreigners the prices in NZ must come down, as soon no Kiwi will actually still be able to purchase anything here for their low wages.

      Also, what happens to those that have their properties free hold, are on a fixed income and can’t keep up with the rates anymore? Asset rich, cash poor? Foreclosure? Sell and hope to buy somethings somewhere?

      the banks are not insulated from default, and the current model is not sustainable. Hence why the RB is doing something, and I think also the fact that new house buyers need to have a minimum deposit, so it would just make sense to have the same for speculators. It can’t be that someone can borrow money on the value of this other mortgaged properties….20% – 30% cash deposit should apply to all lending in NZ for housing. That would probably take a bit of heat away.

      • Tracey 8.1.1

        You really believe that the RB is doing this because it sees banks heading back into trouble?

        • Lanthanide 8.1.1.1

          Not that they “see banks heading back into trouble”, but to prudently avoid trouble arising later.

          Prevention is much cheaper and less stressful than cure, for banking woes.

          • Colonial Rawshark 8.1.1.1.1

            +1

            I have to say that the RBNZ still seems too complacent about the banks search for extreme levels of profit.

          • Jones 8.1.1.1.2

            But the banks are already in trouble… whether they know it or not. This debt-based monetary system is a confidence game. It will only keep going as long as people keep believing in it or, perhaps more importantly, can afford to participate in it.

            • Colonial Rawshark 8.1.1.1.2.1

              The big European banks are all essentially insolvent. The Chinese banks are hiding a huge quantity of NPLs on and off their books. The US banks are now way deeper into the derivatives game than they were 2007.

              Liquidity can cover up insolvency for a time, but it cannot resolve it.

              When this blows up, it’ll be ordinary people and idiot politicians who will be the victims.

        • Sabine 8.1.1.2

          Yes.

      • DH 8.1.2

        “Not one to give a fuck in general because effectively I am sorted – have a place to go to on the country side when shit hits the fan, i have no debt, i own my bike, and even my business is loan and lease free. I can move anytime it gets to shitty.”

        I’ve been looking at a move to the country as well but, crikey, the rates are high in many areas. Some are near double Auckland rates. Can’t bloody win.

  9. adam 9

    I’m not sure how to post just the picture – in this case cartoon. But me thinks Mr Evans has aced it again.

    http://thedailyblog.co.nz/2015/05/14/malcolm-evans-house-prices/

  10. BLiP 10

    There is no housing crisis in Auckland

    ^^^ John Key 13 April 2015

  11. sabine 11

    Well, you could also say that he is a fuckwit.

    🙂

    this was ment as a reply to blib.

  12. Brigid 12

    There’s no need to even talk to the Australian banks. We own Kiwibank. Why has it never offered housing loans at 1.5%?
    Alas one may as well bash one’s head agin the wall as suggest any political party has the courage to even suggest this, let alone implement it.

    • Nic the NZer 12.1

      In order to remain solvent (able to make payments for its depositors) the NZ banks need to be able to buy reserves from the RBNZ. They do this at the OCR (official cash rate), which is set by the Reserve Bank. In order to be able to lend at 1.5% Kiwibank would need to be able to buy reserves from the Reserve Bank at essentially zero% (yes, the RBNZ could provide these) but this would mean legislating them an advantage. If you compare the mortgage rates with the OCR (and 90-day interbank rates) for the same period you should observe that the mortgage rates track the OCR (with an additional bank margin). So what you are actually calling for is the RBNZ to lower the OCR, and if they did this it would likely bring the rates of all the banks down to a lower level.

      http://rbnz.govt.nz/statistics/key_graphs/90-day_rate/
      http://rbnz.govt.nz/statistics/key_graphs/mortgage_rates/

  13. Red delusion 13

    Brigid is a glaring example of why the left should never be allowed in power

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