Reserve Bank Governor Adrian Orr recommends new housing agency to coordinate response to rising house prices

The Reserve Bank has recommended that the Government introduce a new housing agency to coordinate its response to rising house prices.

Reserve Bank Governor Adrian Orr has released his official response to Grant Robertson, after the Finance Minister wrote to him last month requesting the Reserve Bank to consider how it could help stabilise house prices.

Robertson wrote to Orr seeking advice on whether to include stability in house prices as a factor for consideration in the Reserve Bank's Remit when formulating monetary policy.

The Reserve Bank's Remit is its operational objective. It currently includes keeping inflation between 1 and 3 percent with a focus on keeping inflation near the 2 percent midpoint; as well as supporting maximum sustainable employment.

Orr has recommended that housing be included in its Remit, although he warns that it could make monetary policy "less effective" and that including rising house price concerns could result in potential trade-offs with the other objectives.

Orr has also stressed the need for a single agency to coordinate the Government's response to rising house prices. He said the Reserve Bank welcomes the opportunity to participate within the Government's wider response.

Orr admitted that the Reserve Bank's monetary policy-led decline in interest rates has contributed to a rise in house prices. But he said the lower interest rates have also supported housing affordability, by lifting employment and household incomes.

The low-interest rates, combined with property investors and first-home buyers competing for limited housing stock in New Zealand, has seen house prices soar by 20 percent on the same time last year, defying predictions of a COVID-19 crash.

"House price instability is harmful to our aims of reducing inequality and poverty, and is also likely to negatively impact the Government's aim of creating a more productive and inclusive economy," Roberson said in his letter to Orr.

"This is particularly the case where investments in the economy are increasingly being made in the existing housing stock, rather than in other more productive assets."

Finance Minister Grant Robertson and Reserve Bank Governor Adrian Orr.
Finance Minister Grant Robertson and Reserve Bank Governor Adrian Orr. Photo credit: Getty

Until May, the Reserve Bank used loan-to-value ratio (LVR) restrictions to cap banks' mortgage lending to borrowers that have low deposits. The restrictions were removed to help maintain credit flows and to support the mortgage deferral scheme.

The Reserve Bank now intends to bring them back next year to help reduce the house purchasing frenzy.

It comes as new Real Estate Institute data shows the number of residential properties sold in November across New Zealand increased by 29.6 percent from the same time last year. It's the highest number of properties sold in 13 years.

Orr is now calling on the Government to support its bid to introduce debt serviceability restrictions, such debt-to-income (DTI) limits, on mortgage lending.

"We request that the Government gives consideration to adding restrictions on debt serviceability (that would include DTI limits) to the permitted tools in 2021," Orr's response reads.

The Reserve Bank also has its Funding for Lending Programme (FLP) - making up to $28 billion available to banks at the record low interest rate of 0.25 percent to lend and help stimulate the economy.

Some have questioned if the FLP will add even more pressure to an already stretched housing market because there is no requirement for banks to target the lending to productive investment, such as new businesses, rather than property investors.

"The Reserve Bank's funding for lending scheme could pump up to $28 billion into the banking system but there would be no requirement for that money to flow into productive parts of the economy," National's Shadow Treasurer Andrew Bayly says.

But Orr says restricting the FLP to only new business lending would limit its impact.

"The FLP's monetary policy effectiveness would be impaired."

Orr has acknowledged that house price instability can threaten the resilience of banks.

"Sharp declines in house prices during a recession can cause significant mortgage defaults and large losses for banks. This risk is particularly acute when many mortgage borrowers are highly indebted, relative to their incomes and home values."

But he says high house prices can also encourage more development.

"Higher house prices, relative to the costs of house building, will also encourage increased building activity, as it becomes cheaper to build new than buy existing. Increased house price inflation can therefore encourage increased supply."

Robertson has responded to Orr's recommendations in a statement to Newshub. 

"I thank the Governor for his response and will consider it, along with the advice I have requested from the Treasury. The Government will make announcements in the New Year."