Known as the ‘Matthew effect‘ in honour of the Gospel of Matthew from whence it comes, the principle of those who have much being the recipients of more, has been embedded in society since the times of the Bible, and probably before. The Matthew effect is very much in force in the New Zealand property market at present, as in many countries in the world. The effect appears to have been exacerbated by monetary policy in the era of COVID-19. New Zealand house prices have risen an average 20% over the last year and the initial deposit is becoming ever more unaffordable for first time home buyers. While those who have houses can borrow against them and leverage their wealth ever upwards, first time buyers have to save for ever longer. Dropping interest rates are currently being blamed for the increases. This week our Finance Minister, Grant Robertson, wrote to Adrian Orr, Governor of the Reserve Bank, asking him to be part of the solution, rather than the problem. Here are my imaginings of some of the correspondence.
I know you don’t like me messing with the Reserve Bank (although I would like to point out that we as the Government do wholly own you) but I really think we need to have a talk. Your monetary policy approach since the start of the COVID-19 pandemic, i.e. the continued lowering of interest rates, has sent house prices in New Zealand into orbit. Not to mention that all the economic predictions said house prices would crash – you economics guys really need to polish your crystal balls better. Also, you know our Government promised to sort the housing problem last term and we are totally going to be in the spotlight on this one in this next term. We just can’t have the prices spiralling up and up and up. Do you think you can come to the party and consider the effects of your dropping the Official Cash Rate (OCR) on house prices?
Yours in hope
You are right that you shouldn’t be messing with the Reserve Bank. Your government gave us our parameters to follow, we have been following them carefully and we don’t appreciate twiddling in between formal instructions. The goals you have set us are to keep the Consumer Price Index (CPI) inflation to 1-3% on average over the medium term (and around 2% in the future) and to support maximum sustainable employment. The only lever we are given to pull is the OCR – we can’t exactly be highly nuanced in our approach or effects. Not to mention that, your fiscal policy has a big impact on house prices – your government backed away from a full capital gains tax so people still see housing as one of their main avenues for tax-free investing. Then there is the issue of slow and expensive release of land for housing, linked to the painful processes of resource consent under the Resource Management Act. Perhaps you should sort your own house out before you try sorting ours?
Yours in bureaucracy
The thing is, house prices really are becoming a big problem and we all need to sort this out together. We can blame each other until the cows come home (we do like cows coming home because that’s when they do the milk production thing which earns 17% of New Zealand’s GDP, but that’s a side thing). However we might all be better off if we could agree that BOTH monetary AND fiscal policy, and a good few others things besides, affect house prices and we need to start pulling multiple levers at once to fix them. And if we are going to blame someone, why don’t we blame the National government for leaving things in a mess. That’s so much more convenient than either you or us being to blame, don’t you think?
So, do you reckon you could say a little ‘yes’ to thinking about house prices as part of your decision making matrix when deciding what the changes in the OCR will be?
Still hopefully yours
If we are looking for a root cause for high housing prices, it might be a good idea for the Labour Government to do their homework and remember the not too distant history of the New Zealand economic reforms of the 1980s. You know, when the Lange-Douglas Government ripped apart the fabric of social housing in New Zealand, a fabric which all subsequent governments of all colours failed to darn or reweave?
You also need to remember that all is not completely rosy in the New Zealand COVID-economy. We feel we have weathered the storm, and everyone is excited by all the vaccines that may turn up soon. However, the coming summer will see agricultural producers with reduced revenue as their produce rots on the bushes and trees due to lack of pickers, not to mention markedly reduced tourism revenue that is normally at its peak in summer. We bankers need to have lots of acorns still in our hidey-holes for the summer, which may feel like an economic cold snap.
However, I do get your point to some degree. We think we include housing in our mix of parameters because aspects of the housing market are embedded in the CPI, like building materials and rents. But I have had to help my kids buy their own first homes and that isn’t the New Zealand in which I want to live (however if you quote me on that I might have to kill you). So, yes we can say to the media we are having a little chat about things and we will take your concerns into consideration. We will even go so far as to say that we are having second thoughts about going to a negative OCR early next year. To be frank, paying banks to borrow our money does seem like a pretty strange thing to do, though I will also kill you if you say that in public.
Thanks so much, you are one of the good guys. Let’s keep chatting and have a great holiday break.
When we talk house prices, we are talking about one of those wicked problems, with no simple or singular solution. History has put us in our current position and we cannot rewind the path already trodden. This means that comparing our situation or solutions with other countries may not be helpful. House prices seem to be triggered upwards by many factors, but stabilised by few, and dropped by nothing that we have experienced in NZ history. It is very easy for the government, or Reserve Bank, to blame the other entity or a past entity, for its influence on factors which have driven house prices up. However, ALL governments and entities could be guilty of the same effect – they have pulled different levers and all have driven price increases.
Finally, maybe it is time to think about our own culpability, as a nation. We love The Block and Grand Designs, salivating over the high costs and high prices of the houses depicted. We expect that our homes are a central part of our lifetime wealth generation strategy – we expect they will increase in price. Why are we then surprised, or outraged, that what we expect is coming to pass? If we want a different result, perhaps it is time we started telling a different story. Perhaps it is time to stop blaming others (not that government in a democracy is, in fact, an other) and take responsibility for the change we want to see.
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