The Reserve Bank of New Zealand can no longer ignore house prices in the country. The Central Bank is beginning to flesh out its understanding of the crisis and how it affects its policy decisions. Perhaps the trickiest task the Bank has to address is how it will interpret the notion of 'sustainability' regarding price increases.
Over the past decade, the increase in NZ's property prices has concerned first home buyers and the public in general. However, the price increases experienced over the past 12 months prompted Finance Minister Grant Robertson to ask the Reserve Bank to begin considering the price of NZ property in conjunction with the other issues it follows.
Covid, historically low-interest rates, and investor incentives keep the housing market churning
The country has dealt with several unprecedented economic events in the past 12 months. The one event we are interested in is the increase in house prices over this time, up by 24%. The average house price in NZ is now over NZD805,000, approximately x12 the average annual income. Buying a home in NZ is practically out of reach for anyone without equity to tap.
While the Central Bank hasn't figured out exactly how NZ house prices will factor into their decision making, they have begun to think it through publicly via factsheets and periodical Financial Stability Reports.
Why the Reserve Bank is concerned about New Zealand's rising house prices
The Reserve Bank appears to place a great deal of concern on recent home buyers. In my opinion, perhaps a little too much. The Bank observes that a disorderly unwinding of monetary policy support could adversely affect these property owners, who have brought at the top of the market. Considering the Reserve Bank's approach to monetary policy is typically 'orderly', this risk appears overblown or invented on their part.
Here I'm hoping that they relegate this concern down to the bottom of their list when making policy decisions.
As the Bank works through exactly how housing will be folded into its decision making, I wonder how much more attention might be directed toward property investors. The Bank has already implemented a loan-to-value ratio more restrictive to property investors than a typical home buyer. However, the incentives for property investing remain strong. I, for one, would like to see property investment money more freely flowing into productive assets. As a custodian of the economy in general, perhaps NZ's productivity rates should be scrutinised more thoroughly by the RBNZ. The tools the RBNZ has to facilitate this is limited, but even stricter loan-to-value ratios would be a great start.
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