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New Zealand Budget 2013Gareth Morgan

Response to housing problem limp-wristed #nzbudget

New Zealand Budget 2013Anybody unfortunate enough to pick up a copy of Wellington’s daily newspaper today was assaulted by a screeching headline ‘Pricking the housing bubble’. Accompanying this was an entire front page devoted to how Bill English’s 2013 Budget is some sort of “3-pointed” magic pin. Someone find me the smelling salts!

Housing is cannibalising the rest of the New Zealand economy, no disagreement there. In fact I’ve been going on about this for years. There are policies that can stop this stupidity, but Bill English’s bag of tricks isn’t up to the job. The key ingredient – tax neutrality for housing – is missing and what is there, with few exceptions, is mutton dressed up as lamb.

I’m not going to focus on the decision to support non-government, not-for-profits, supplying community housing. This is good in principle but where will the new funds and therefore significant growth in supply come from? Nor am I going to delve into the decision to allow the fast-tracking of resource consents for new subdivisions. What does this say about the quality of urban living for all residents and community-based democracy? But I am going to address the Reserve Bank’s new prudential tools.

I’ve repeatedly gone on record in the past saying that the Reserve Bank’s prudential policy was creating a housing monster – the policy rewarded banks for lending to housing as opposed to other sectors. The policy effectively meant housing loans were cheaper to supply for the banks than other loans because they had to keep relatively fewer financial assets to back them up. This approach was wrong, and the economy as a whole has paid the price. The housing market en masse is a big risk for the economy – simply because so much money is invested in it – and this ‘systemic’ risk should have been reflected in the costs the banks faced when they made housing loans. It wasn’t.

As an aside, it would be nice to think that bankers would be able to see and factor in these systemic risks at the time they make loans, leading them out of self-interest to pull back from lending that  jeopardises the system and therefore their own bank. But in this respect it seems that bankers, despite with their fancy qualifications and fat salaries, are no different to any other business people or traders and are incapable of incorporating systemic risk into their business decisions.

The signalled path ahead for grappling with the overheated housing market will be ugly to watch and ultimately unsuccessful.

One piece of positive feedback I have about the Reserve Bank’s new prudential rules is ‘Hurray, at last we face the possibility that the favourable prudential treatment of housing might be removed’. Another positive is that it seems likely automatic stabilisers in the system might be enhanced with banks being required to put aside more capital into reserves during good times (limiting their ability to make new loans then but gaining gunpowder for tough times) than they might otherwise have done. This goes someway to addressing the lemming tendencies of bankers. However that’s about where the good news ends.

There is a definite impression that the Reserve Bank will be using these tools to dip in and out of the lending markets, depending on how hot they view the housing market. In technical jargon, the RBNZ has the capacity to use these tools ‘counter-cyclically’, just as it does with the OCR which directly impacts on interest rates. How else to interpret the Reserve Bank’s own description of what it will be able to do:

“The Reserve Bank’s aim would be to apply the restrictions at times when…lending was judged to be posing a significant risk to financial system stability.

What nobody seems to be saying, and this is surely a puzzle, is that New Zealand has been down this track before and failed spectacularly. In the post-war period until 1984 the Reserve Bank used direct tools similar to those being proposed now. The RBNZ had tools that they could apply at will to alter the costs to banks of loans depending on the sector which received the loan, and the state of the business cycle. This facility is now being granted to the RBNZ. The RBNZ also had tools to influence growth in the different types of loans banks made (eg low equity loans) – snap again. As well, then the rules applied only to the banks, not other lenders (like solicitors) – again, this is the case today.

Of course, many things were different in the 1970s. For example, then the government could also force banks to lend to it by requiring them to buy its bonds, and there was no fiscal discipline. Bureaucrats picking winners and politicians forcing banks to fund government largesse was a big part of New Zealand becoming economically unsustainable in the 1970s and 1980s. Back to that future will be suicide.

But the one constant between then and now is that the RBNZ now has tools available to it to influence the allocation of bank loans depending on officials’ views about the business cycle. That’s really dangerous. It simply isn’t possible for officials to know accurately when in the cycle they should intervene. Getting it wrong with these sorts of weapons at their disposal has serious consequences. It’s bad enough with interest rate levers – and the RBNZ is careful to give long lead-ins to changes there – but prudential tools used for counter-cyclical purposes are a different fish altogether.

Another lesson, duly acknowledged by the RBNZ and behind some of the fine-tuning they are currently considering, is that leaving any lender out of the new regime gives that lender a competitive advantage (as solicitors’ mortgage trusts once had).  You would no longer have a level playing field, and worse yet, the ones who would do well would be out of view of the regulators. This clearly increases risk in the system, it doesn’t reduce it. And don’t forget the added costs policies like this impose on the economy too – new bank compliance costs that will give a step jump in interest costs and higher tax-funded expenses for the RBNZ.

Finally, a key lesson from earlier regimes is that central bank prudential policy cannot do all the work. We know (as was true in the 1970s) if appropriate supporting policies are missing, relying on  prudential policy will at best delay inevitable adjustments and invariably introduce imbalances elsewhere in the economy.

In the current case, investment in housing is eating into the structural strength of the New Zealand economy. This is because it has favourable tax status as well as favoured status with the RBNZ prudential guidelines. Making prudential policy a discretionary cyclical tool is really high risk and the housing tax break hasn’t been touched.

The signalled path ahead for grappling with the overheated housing market will be ugly to watch and ultimately unsuccessful.


  • Paul Martinson

    Scary stuff Gareth. I’m going to go home shortly with a bottle of wine under my arm and wait for the ‘melt down’. You’re a good economist and know what your talking about and I can’t disagree with you at all……but Bill E is a politician first (sadly)and is tweaking things here and there, in part ,because they’re running scared of loosing votes if they do too much that causes their voters to lose value in their homes. I heard Bill say that on They do recognize the ‘housing shortage’ issue at least…Heaven help us…………………….

  • John Morrison

    I think maybe we are too late, the amount of “house mortgage money” (and dairy farm mortgage money) that is in circulation must be enormous. How many jobs is it supporting? Jobs that will be lost should the RBNZ pull the wrong lever at the wrong time. Well, I suppose then peeps will be able to stop moaning about low interest rates!!

  • jh

    Cornell Townsend of the property Council “amazed and delighted at radical changes he never dreamed could come into force”
    I always think of Mr Roth (Godfather 1).

  • bob

    Cats need houses too…

  • wikiriwhi

    it’s obvious Morgan is against home ownership and the Kiwi dream. he’s also talked about closing down Gisbourne and the entire East Coast in the past and drawing its populations into the central districts. He never talks NZ sovereignty either. He’ll be advocating more Chinese ownership soon

    • Paul Martinson

      how can it be obvious he is against the kiwi dream when he’s just pointing out the ‘kiwi dream’ has caused much of the problem in the first place. Observation of fact, is not negativity….but the realization that our houses are probably grossly over-priced is still scary as hell. Sovereignty is here and now..

      • wikiriwhi

        The collapsing kiwi dream is the collapsing of sovereignty re: Greece, Eurozone . As John Key stated, Cyprus can happen here

        • Paul Martinson

          see what you mean. Apparently the front desk of overseas investment office ,is at times, more like a Chinese visitor center.

          • wikiriwhi

            Well Key has proved himself to be the smiling assassin sell out. National broke their promise to keep the state own assets in the hands of everyday mum and dad investor, instead the shares have gone to big corporations

          • Paul Martinson

            Since Key called Gareth (and therefore conservationists) ‘kitty haters ‘he’s no longer on my Christmas card list. But asset set sales were not a broken promise, as they campaigned on having them and got their mandate surely.

          • wikiriwhi

            Splitting hairs. key has proved his govt has no integrity towards the electorate and is simply acting on behalf of the usual suspects in big business. The good news is accountability is still alive with IMF boss Christine Le Garde in handcuffs. lets hope Jamie Dymon is next

          • Paul Martinson

            FYI; “IMF still confident in Christine Lagarde after French probe (Associated Press: Washington, Wed May 29 2013, 10:32 hrs)”
            You might be proven right one day..but innocent till proven guilty and all that jazz.
            cat loving Key has proven only that he’s a good politician by remaining high in the polls ..while we all bite the bullet for this recession.

  • Richard Morgan

    As they say, there’s more than one way to skin a cat.

  • Craig Millington

    Thanks Garth … I sometimes wish I had 5 mins of your time (prob couldn’t afford it) but as a normal Kiwi with two homes and now 56, and just some common sense approaches to the use of the money I do get. I wonder if the reason Kiwi’s prefer this investment is less about the tax breaks and more about a trust issue. I’ve lived through a share market crash where everyone was pouring their hard earned $s some out of greed, into this then “BANG” it went bust. Yet the company directors with their trusts still had their $$$s. Then there were the Finance houses, “BANG” more lost their $$$s, hard working kiwi’s, again the directors had their trusts and some have jail time. Then if I recall one Reseve bank governer be-moaned all this money in housing and that the bubble will burst suggesting we should get out of property or lower our expectations. “Bang” more finance houses went belly up taking the $$$s of hard working kiwi’s money. Then that was followed by this dam recession. Meanwhile house prices have gone up and down a few % & I still have my rentals and more equity. The then reserve govoner or was it a politician admited they got it wrong and property was the safest at that time. Am I wrong in suggesting this is a trust issue for most kiwi’s they won’t be drawn in again, allowing busnesses to use their money, get greedy and go under again. Just wondering? I’m not an economist or anything special just a Mum & Dad investor.