Top Menu

Housing boom figures should convince government to put its hands back on the steering wheel

Housing boom figures should convince government to put its hands back on the steering wheel

Housing boom figures should convince government to put its hands back on the steering wheel

Housing boom figures should convince government to put its hands back on the steering wheel

Guest post by Bernard Hickey

There’s a tipping point for any pragmatic policy-maker where the facts change to such an extent as to render any existing strategy redundant.

Depression-era economist John Maynard Keynes explained his change of mind on monetary policy after the Depression thus: “When the facts change, I change my mind. What do you do, sir?”

This week New Zealand reached that tipping point when it became clear the facts have changed and it’s time for the government to change its mind.

The facts on the economy are so demonstrably different to expectations that the government, the Reserve Bank and voters should reassess the direction embarked on four years ago when the National-led government took power and committed itself to a ‘hands-off’ approach to monetary policy, the big Tax switch, and a plan to return the budget to surplus by 2014/15.

Thursday’s Household Labour Force Survey showed unemployment blasted through expectations to 7.3%, its highest level since 1999. Employment actually fell 8,000 when it was forecast to rise by the same amount. Prime Minister John Key was clearly surprised to the point where he even suggested policy makers should rely on his anecdotal evidence rather than Statistics NZ’s figures. Finance Minister Bill English was sensibly more subdued.

Friday’s figures from the Real Estate Institute of New Zealand (REINZ) showing median houses hitting record highs in October both nationally and in Auckland simply reinforced that the economy is heading off in exactly the wrong direction.

And it’s not a new direction. Cheap and easy credit along with supply shortages are inflating house prices beyond the reach of young families wanting to own their home, particularly in Auckland.

The median house price in Auckland rose 14% in October from a year ago. Sales volumes rose 44% in October from a year ago in Auckland. The median price rose 5.8% in October from a year ago and volumes rose 32.6% from a year ago. The market is so hot the REINZ even bragged that the market had ‘roared into life’ in October.

Party like it’s 2007 with a jobless rate like it’s 1999

We seem to be back where we started in late 2007.

A hot housing market is forcing the Reserve Bank to keep the Official Cash Rate higher than it would otherwise like. This in turn keeps upwards pressure on the New Zealand dollar, which makes our manufacturing exporters less competitive. That in turn costs jobs, many of which are high wage jobs.

Key may be seeing anecdoctal evidence of job creation in Auckland, but just this week Christchurch electronics manufacturer Dynamic Controls proposed shedding 60 jobs and high tech exporter Rakon announced it would cut 60 jobs and move production to China. Solid Energy and Tiwai Point announced hundreds of high paid job losses last month, which have yet to be registered in the jobs figures. Jobs are being created, but they are in lower value services sectors such as healthcare, big box retailing and restaurants that are not subject to international competitiorn, or are higher value jobs in real estate and financial services. That means fewer mine workers and factory workers and more Warehouse checkout operators and real estate agents.

The high exchange rate is sending a clear signal to consumers and businesses alike: buy imports, convert businesses from exporting to importing and employ people involved in real estate investment and financial services. The record low interest rate and a loosening of lending controls for mortgages is convincing a whole generation of borrowers that they can afford their dream home if only they can outbid their rivals by borrowing as much as they can with a 5% deposit and interest rates at 5%. The Reserve Bank is forecasting their rates will only rise around half a percent in the next two to three years and the Government’s response to the Productivity Commission’s Affordability Inquiry insures few new houses will be built any time soon.

Banks are offering free tablet computers, NZ$1,000 cash back bonuses, discounts on legal fees and low-doc loans, just as they were in 2007. The Financial Stability Report this week (figure 4.6) showed another easing of lending rules for households in the last six months and banks are at it hammer and tongs to win over disgruntled ANZ and National customers dislodged in their merger.

The messages are as clear as a bell. Gear up, buy property and you can’t lose. Don’t bother investing to export. You’re much better off borrowing to import because foreign investors will keep lending to New Zealand forever and we can always sell off more businesses, state assets and land as well to make sure we fund our current account deficit. Leverage up and just wait for the tax free capital gains to fall into your lap. It’s much easier than building or producing something to export it.

It wasn’t supposed to be like this

The National-led government began with such promise and ambition. It wanted to turn around the economy’s obsession with property investing and reverse the decline in the productive and exporting sectors.

The big tax switch of 2010 was designed to discourage consumption by increasing GST and encouraging production and investing by lowering corporate and high income tax rates. This was supposed to switch the incentives. The introduction of tougher tax rules for residential property investors was also supposed to knock the rental propety obsession on the head.

The aim was to reduce the indebtedness of the household sector and the vulnerability of the economy by earning plenty of foreign exchange revenues to pay high wages and invest in export businesses. It was supposed to create a virtuous circle.

Instead, the gap between the tradeable sector (including exporters and those competing with imports) and the non-tradeable sector (financial services, government, real estate and retailing) is even wider now than it was in 2008.

New Zealand’s net foreign debt is only marginally lower, largely because of reinsurance payments for the Christchurch earthquakes. The ‘foreign drain’ of interest payments on foreign debt and dividends on foreign owned assets remains embedded in the economy.

Even Treasury is forecasting the current account deficit to rise to 6.7% of GDP by 2016 from 3.8% in 2011. New Zealand has actually been running a goods and services trade deficit this year. That’s before the interest payments and dividends to foreign owners. Simply from the four banks alone, their profits rose 12% to NZ$3.2 billion or about 1.6% of GDP this year. See more here in Gareth Vaughan’s article.

Yet the New Zealand dollar is still 15% over-valued according to the IMF and above where it was in 2007. The usual economic theory says the exchange rate will act to help balance a current account deficit. It should be falling to close the gap.

The usual theory

The trouble is the theory of free floating exchange rates responding to commodity prices and economic fundamentals such as current account deficits has been blown out of the water by the Global Financial Crisis and the various responses of intervening and printing by central banks and governments.

Central banks and governments in six of the top 10 currencies by volume are intervening directly or indirectly in their currencies. The United States, Japan, the European Union, the Bank of England, Switzerland and Hong Kong have all either engaged or threatened Quantitative Easing (Money Printing) to try to boost their economies and weaken their currencies over the last year. The other four in the top 10 who aren’t intervening in their currencies are Canada, Sweden, Australia and New Zealand.

Capital flows, much of it printed by central banks at 0% interest rates, are now cascading around the world to those currencies with higher interest rates (than 0%) where money is not being printed. Much of this money is flowing into property sectors and stock markets. At least some of the demand for central Auckland property is from Asian investors able to source funding in their home countries at much less than the 2.5% of our Official Cash Rate.

Many countries have acted to stop these unnatural capital flows from damaging their productive sectors. Some have imposed capital controls. Others have printed money to buy foreign currencies to stop their currencies from rising. reports here that Switzerland’s latest interventions have been successful in capping the rise of the franc.

They all have a similar problem. If they cut interest rates to give some relief to their productive sectors and weaken their currrencies, this would just encourage more leveraged investment in property, risking the financial system blowing up another asset bubble that destabilises the financial system. The last thing they want to do is create another bubble of Too Big To Fail banks and unsustainable house prices.

There is another way

So central banks and regulators have acted to cauterise their property markets from the blunt instruments of monetary policy. They’ve used so-called ‘macro-prudential tools’ to slow down lending into these property markets to either avoid having to hike official cash rates or allowing them to cut rates.  Here’s an IMF paper on ‘macro-prudential tools’ to show how it’s being done elsewhere.

Canada’s Minister of Finance announced in June this year that mortgages with government-backed insurance would be limited to 80% of their home value (down from 85%) and be cut to 25 years (from 30 years). Any borrowers’ maximum debt service ratio would be also be limited to 44% of income and borrowers would not get government-backed mortgage insurance on houses worth more than C$1 million. In March Canada’s Office of the Superintendent of Financial Institutions announced it would limit home equity lines of credit (HELOC) to 65% of the value of a home and would not provide mortgage insurance for HELOC loans. See more here at The Global Mail.

Last week the Bank of Israel imposed a loan to value limit for first home buyers of 75%, a limit of 70% for existing home buyers and a limit of 50% for rental property investors. See the Bank’s directive here. At the same time it announced a surprise cut of 25 basis points in its Official Cash Rate to 2% to help support its economy and offset the impact of a rise in its currency. Israel’s house prices have risen 2.9% in the last six months.

But back in Orthodox land…

Meanwhile, New Zealand house prices, as measured by the REINZ’s stratified index that takes out some of the ‘noise’ from more sales of expensive houses, rose 3.5% in the last 3 months and 6.9% in the last year.

If only the Reserve Bank could slow down the housing market with macro-prudential tools instead of the Official Cash Rate.

The Reserve Bank is investigating using such tools, including Loan to Value Ratio limits and things such as ‘counter cyclical capital’ buffers, which would require banks to hold more capital at times of strong economic growth.

But this work is still only investigatory and the Reserve Bank has yet to agree a Memorandum of Understanding with the Government on how and when it would use such tools. New Governor Graeme Wheeler even said he wouldn’t use the tools even if he had them….yet. See more here in this piece with a video of Wheeler’s views. Previous Governor Alan Bollard looked at using them in 2006 and decided against it. He reiterated last month he was opposed to using them.

It beggars belief. So when would the Reserve Bank and the new Governor use them? Is a 14.4% rise in house prices in the country’s biggest real estate market in one year (past tense) not enough? House prices rose 3.5% nationally and 7.7% in Auckland in the last 3 months. That’s twice as fast as the growth being seen in Israel. Also, inflation is running below the Reserve Bank’s own target band of 1-3% and below the 2% average that he has agreed to focus on in his new Policy Targets Agreement. I

Why won’t he act? Surely he’s not asleep at the wheel(er)?

….And back on Planet Key

In the meantime John Key has pledged to stay the course with the government’s ‘hands off’ strategy for the currency and the Reserve Bank Act, and will stick to the plan to get the budget back into surplus by 2014/2015. This implies a fiscal policy tightening of around 4% of GDP over the next three years.

If the government is going to tighten by 4%, which part of the economy is going to expand by the same amount or more to avoid going into recession? It was supposed to be the private sector and, in particular, the export sector. That now looks very unlikely with a currency stubbornly over 81 USc and rising towards 80 Australian cents. It also looks unlikely with Europe in or near recession, China slowing from a 10% plus growth rates to closer to 7% and Australia slowing to under 3% growth.

So what to do?

If the government and Reserve Bank do acknowledge the facts have changed, then what should they do?

Here’s a few ideas in no particular order:

Introduce loan to value ratio limits similar to the Israeli ones – They are conventional monetary policy tools now and would avoid a whole new generation of borrowers getting up to their eyeballs in debt just before interest rates start rising again. They will also reduce the financial vulnerability of any banks were house prices to fall sharply because more equity means less chance of mortgagee sales.

Introduce counter-cyclical capital buffers  – This would slow down bank lending growth in a much simpler way than an increase in the Official Cash Rate and doesn’t punish existing borrowers for the actions of those borrowing at the fringes. It would mean banks have to top up their equity, probably by not sending dividends back to their Australian parents. That would help reduce the current account deficit in a similar way to what happened in 2009 when banks agreed to pay higher tax rates. It would allow the Reserve Bank to cut the OCR and give relief to business borrowers, or at least offset any increase in interest rates imposed by bank shareholders to protect their profits given the higher capital requirements.

Increase the risk weightings and capital requirements for mortgage lending – This would force banks to slow mortgage lending and put aside more of their own capital to back these loans. It could be argued this would reduce the ‘over-weighting’ of New Zealand bank assets to one type of asset. Any investment manager will tell you that diversification reduces risks. Gareth Morgan has suggested such a move in his 5 point plan.

Introduce a land tax or capital tax or capital gains tax – This imposes a holding cost on land-banking property developers and transfers some of the easy wealth gains of the recent gains to non-property owners. It also evens up the playing field so that capital gains are taxed as much as income. Gareth Morgan’s Big Kahuna idea for a tax on capital is the simplest and most redistributive idea around.

The Central government and local government must urgently work together to build 50,000 new homes in Auckland and Christchurch – The combination of the market and local council regulation has clearly failed to deliver the affordable housing desperately needed to put some pressure downwards on house prices and make New Zealand an attractive place to live.

Rewrite the Reserve Bank Act to allow it to target other variables than inflation – These other targets should include a combination of the exchange rate, employment levels, the current account deficit, inflation and wages. Inflation targeting is now widely discredited overseas, yet the orthodox dominates at the Reserve Bank and Treasury.

Rewrite the Reserve Bank Act to allow it to buy government bonds directly from the government – This would allow the Reserve Bank to finance the government deficit once interest rates are cut to the lower bound of % and avoid deflation. It also removes the financing restriction for rebuilding Christchurch’s infrastructure and Auckland’s infrastructure, including housing. It may not be necessary just yet, but we’re not far off given the current trends with employment, inflation, the global economy and the budget deficit.

Run a deficit for longer – The government needs to abandon its budget surplus target for 2014/15. Moody’s has already said it would not downgrade New Zealand’s credit rating if this happened and last year’s credit rating downgrades by Fitch and Standard and Poor’s did not lead to interest rate increases.


This opinion piece was first published by Bernard Hickey on and is reprinted here with permission.

  • Raf Manji
  • Raz
    • Paul Scott

      yes, soon as it gets the chance

  • Guest

    Hi Bernard. Very compelling article – you’ve clearly spent a huge amount of time condensing this information and I highly appreciate it. I noticed your second to last point “Rewrite the RBA to allow it to buy govt bonds directly”. There has been a lot of debate (particularly the flaming of Russel Norman) about the suggestion of QE as a tool – your suggestion here seems to make room for both QE and monetizing of govt debt to finance the deficit over coming years (lets say the back to surplus target gets pushed out a few more years). Have I interpreted this right? If so (and I’m learning but not entirely sure) what are the positive gains that you speak of for Christchurch? Is it simply an expansion of available funds to get the ball rolling on the rebuild? Can it be much more direct than this? Thanks!

    • Peter Quixote

      absolutely compelling article Bernard, tax tax tax

  • Peter Quixote

    More up here on the socialism tax, which is universally rejected everywhere I asked..
    here it goes the big kahuna
    “Introduce a land tax or capital tax or capital gains tax – This imposes a holding cost on land-banking property developers and transfers some of the easy wealth gains of the recent gains to non-property owners. It also evens up the playing field so that capital gains are taxed as much as income. Gareth Morgan’s Big Kahuna idea for a tax on capital is the simplest and most redistributive idea around.”

    ahh yes, redistribution, that will fix everything

    Is there any support for the Morgan asset tax, which he sells by calling it a wealth tax. No.
    Aside from other distortions, a key point to note is while the super annuitant, who paid tax all their working life, has to sell the one significant asset they may own (assuming they were a ‘worker’) to pay Gareth’s tax, someone who can’t be bothered working gets a handout from Gareth with no obligation to train or work. Of course the handout isn’t actually from Gareth, it’s from the poor working stiffs whom he will be making sell down their homes in their near future.
    His answer to super annuitants (and DPB recipients – people might have a different view on them) is ‘you have at least 2 years to prepare. Get a job. Downsize your house.’ All so that those who do not wish to work, do not have to (unless they own a house of course.)
    On top of that, his approach really does turn employees (those that only have their labour to trade) into fodder for the matrix: taxed on your wages, taxed when you spend, taxed when you save. And taxed annually if you have the temerity to use your taxed income to buy a house to live in and perhaps raise a family. It really is an Orwellian view on the role and value of people in society. In Gareth’s view they are nothing but units of production.
    By the way, he makes clear in his book that he would not stop at the home – if he could easily tax the car and boat, he would.ahh yes, redistribution, that will fix everything

    • Gareth Morgan

      A wealth tax is no more than an income tax without loopholes Peter (Economics 101) so that suggests you’re arguing for the perpetration of loopholes. I’ll leave you to justify that. It’s nothing to do with socialism – you can calibrate a wealth tax to yield the same revenue as an income tax without loopholes – income after all is simply the increment to wealth.
      So don’t be frightened, think a bit more about what’s actually being discussed here. Best wishes.

      • Paul Scott

        a wealth tax is not income tax Gareth, it is a tax on assets economics 102

        • Peter Quixote

          Assets are not income Gareth,economics 103.
          Neither are aessets wealth Gareth, simple language 101..
          try to be internally honest about you progrom.
          There is universal rejection for your socialist tax from Labour party, NZ First, National.
          Do environmental work Gareth, that where you are brilliant, keep out of politics your progrom is naive even stupid. Your other work is fantastic,

          • Curtis Antony Nixon

            Gareth is saying income is a part of wealth but wealth contains other components so he wants to tax it all, not just PAYE income tax for poor slobs.

  • Luke Benton

    A few questions:

    When will we, as a collective, shape our society with the knowledge that phenotype (who we are) is a result of genotype (our genetics) in combination with our environment? When will we acknowledge that a society organised around contrived economic and legislative systems, largely removed from knowledge and logic of natural systems, is efficient at developing individuals who think in terms of contrived systems without much application of knowledge and logic of natural systems?

    When will we recognise that it is our socio-economic environment which directly
    fosters the development of war, crime, hate, greed, fear, apathy, depression, anxiety, myopia, addiction, and warped identities within modern society? Why is the wealth of human knowledge and technology not being used to evolve our
    socio-economic environment so as to reduce experiences which lead people to things such as war, crime, hate, greed, fear, apathy, depression, anxiety, myopia, addiction, and warped identities within modern society?

    Why do we allow the creation of private and public debt to remain in the hands of (Rothschild) private financial corporations? As $$$ have become such an integral part of modern society; does it not make sense for a public, for the good of the population, body to have regulatory control? Why do we allow more than 1-2% interest on (public and private) loans? Why do we allow such financial profits to remain in the hands of private corporations instead of being injected back into the local economy through social development initiatives? Is our current system set up for the good of humanity, or for the good of a few individuals behind these private corporations?

    When will we recognise that parenting is the most important job a New Zealander could undertake, and implement a universal parenting wage? Why are people calling for more jobs when there are hundreds of thousands of full time workers not only not being paid, but being forced to work less important jobs which detract from their primary role as parents just to provide their family with the material basics of life?

    When will our knowledge and technology be used for the common good, for the good of life, rather than the corporate good? We have the ability to redefine our production and distribution methods and systems so as to better provide the resource needs of all New Zealanders. We have the ability to evolve democracy from a representative farce to a more direct participatory model. Why are these things not being talked about or nationally developed?

    When is the general population going to recognise that our species currently has the knowledge and technology to create a post-scarcity civilisation? We have stepped apart from the natural world in regards to the fact that our entire species can be provided with the resources they need to thrive without competition between humans. Yet we accept an economic system which artificially maintains scarcity. Why is there no national discourse about the wholesale changing of something (a socio-economic system) which logically results in mass human misery (such as poverty, crime, anxiety, depression, war, etc)? Why must we settle for a little tinkering of a system which is logically outdated and detrimental to the flourishing of human life?

  • Matthew Potts

    Quantitative Easing is not money’s a temporary measure and not being used to fund debts..

    • Peter Quixote

      Mathew explainds here that QE funds debts, those debts are the future obligation to the payers of the bonds printed from nowhere, with no value . Economics 104 Mathew .
      print money fuck country

  • Peter Quixote

    New Zealanders shopuld transfer their currency to foreign currency now.
    The winds are socialist.
    Buy Canada, Astralia not USA,
    There is a saying .
    ” you have a job and a bank account in NZ you are over exposed”
    Garteh has a motor bike and millions h can write socialist green soup gibberish and it will not hurt him, but it will you.

  • Paul Scott

    there is no support within Labour party or Nat or NZ First for Gareth socialist re distribution tax . I will continue to make sure this position holds. we will sort out the CGT next. watch

    • Curtis Antony Nixon

      Ah.. who cares about Labour, Nats or NZ First? Gareth’s policies are his own and using perjorative labels like ‘socialist’, ‘green soup gibberish’ and ‘Orwellian’ are just cheap shots. There is so much good information in Gareth’s articles above and all you can do is parrot slogans. P.Scott and P.Quixote are mis-information merchants, they FB to each other and have fake looking FB pages. Pet trolls the Nats have sicced on Gareth I think.

  • terry

    It just shows that John key has the gift of the gab and really doesn’t give a rats ass about the vast kiwi majority .. He’s ruining our country.And bill english i thought was a far better person than this.The repercussions of their stuff ups will take years to get over .Corrupt …..Totally ..All keys doing is playing a lil sideline as PM and watch as he will get a waka and leave nz .He doesn’t care about everyday kiwis and our country. Look after me is all . I wish more kiwis would stand up and give him a taste of kiwi. It’s so funny when he has no pre set questions to answer as he jumps up n down,smiles like a wee kid,gesticulates and looks like he wants go to the loo.. The ‘smiling assassin ‘ has to go asap

  • terry

    To all the tory narrow minded idiots posting here all i can say is get your head outta the sand, open ya minds, get outta your mindset,think beyond the square,stop being so biased ,wake up and care for our contry and not your own agendas . Go Gareth as you are always on the nail . The truth hurts the Tories .

  • Dave Eskildsen

    The answer here is act in haste, repent at leisure! We will have to ride this out to some extent. The ground work for this situation was laid out in 2010, when it became clear there would be no move to allow a correction and transfer of assets from from the over indebted those who had been accumulating the cash over the last several years. The unspoken plan was to allow the debt to remain, and gradually allow future inflation to reduce the tension. Against this backdrop, with repeated assurances that interest rates would stay low for an extended period, what on earth do we expect? All the train enthusiasts in Auckland pretending people will ‘want what they want them to want’ only further reinforces this phenomenon. The way forward is to clearly enunciate, what we (the Government on our behalf) are aiming for, and outline the actual steps we propose to take to get there, clearly telegraphing this to the the public and the markets, then step by painful step we need to go in that direction! The National party preoccupation with the fiscal deficit, while virtually ignoring the faulty economic signals signals will only take us stumbling into a mixture of inflation, recession (either now or later) and continued accumulation of overseas debt with inevitable squabbling about selling “our assets” to foreigners. This is our future if we don’t look to the core and change our focus. (We need to make our economy internationally competitive, and that will need to include a painful reduction in our living standards now, so we can earn our way in the future.)

    Your amendments to the reserve bank act will not be helpful. You can fiddle around with the rules on lending, but eventually we will need to face the music – Monetary policy has been consistently too loose for many years, and we have become adjusted to this reality. Gareth’s CCT is a better bet than a capital gains tax to be sure, (even though I think it is not perfect; debt bias, no reference to inflation for example), but I fear if Labour becomes the Government, a CGT is what we will get (being a weak instrument, and one with distortions and complication).

  • Peter Quixote

    here is the reality , there is absolutely no chance for a capital tax in NZ, ever

  • wikiriwhi

    It’s time to get away from flawed Keysnism instead of treating his
    policies as sacrosanct. It’s failed socialism and carried to its full
    extent, facism. Which effects are being felt more and more. I see
    another fashion label has folded here in NZ. Failed economic Keysnism
    policies from both sides of the house

  • jh

    It’s the media’s job to educate about issues but they don’t. They parrot Professor Paul Spoonely when he says Auckland becomes a better place to live as the population increases (Q+A) but fail to report on the findings of the Savings Working Group. There is more agreement amongst scientists on climate change than there is amongst economists on the benefits of immigration yet you wouldn’t think so. The result is a confused and turned off public.

  • Mr_V4

    Bernard, ahve you read “Dying of Money”, by Jens O. Parsson written in 1974?
    I highly recommend reading it, you can find it as a pdf on the net. After discussing the issue of the nature of inflation (generally) it has some excellent proposals regarding taxation policy, considering this was written back in the 1970’s it accurately foresaw the inevitable issue of labour v capital and discusses the major issues with current taxation policy.

  • Paul Scott