Dawn chorus: Sustainably unaffordable

REINZ figures show 29.8% house price inflation in year to end of May; RBNZ fought to use 'sustainable' rather than 'affordable' in housing mandate, which Treasury said wouldn't work

  
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TLDR & TLDL: REINZ figures for May show annual house price inflation hit a record-high 29.8% nationally as hopes fade that the Government’s moves in November and March to restrict demand might stop inflation in its tracks. There has barely been any slowing in price inflation as the supply of houses for sale has halved and the time to sell drops to record lows.

ASB increased its house price inflation forecast for calendar 2021 from 15% from 10% this morning and the Treasury and Reserve Bank forecasts from last month for virtually no house price inflation by this time next year now look well out of date.


‘House prices sustainable at these unaffordable levels’

It turns out the Government was told last year its change to the Reserve Bank’s monetary policy remit to take house price inflation into account would have little effect. Bloomberg reported yesterday from OIA responses that Treasury

“Attempting to use monetary policy to change the long-run level of house prices would require a persistently higher level of interest rates than warranted by the MPC’s economic objectives. At most, we would expect that the MPC would only mitigate the extremes of the interest rate cycle. Even then, if that entailed significant trade-offs with their economic objectives, then the requirement to have regard to house prices is unlikely to result in a significantly different monetary policy stance,” was Treasury’s advice to Grant Robertson.

The Treasury and RBNZ forecasts from last month for virtually no house price inflation by this time next year now look well out of date. Photo: The Kaka

The OIA responses also reveal the RBNZ opposed use of the word “affordable” in the mandate on housing, and insisted it should be “sustainable.” The Reserve Bank argued ‘sustainable’ was much closer to its financial stability mandate, “where our concern relates to excessive volatility in house prices.”

The Government went in the end with ‘sustainable’ rather than affordable. The Reserve Bank said in its May Monetary Policy Statement the current house prices could be explained by population growth, low interest rates and housing supply constraints.

“The current level of house prices can be explained by these factors, and could be considered sustainable if these factors persist into the future. However, it is becoming increasingly clear that some of these factors may be reversing and are unlikely to support sustained growth in house prices.” RBNZ MPS (Page 29-32)

So what does this all mean? The Government is not serious about using policy to drive house prices to affordable levels, which would be around a half to a third of current levels, depending on assumptions about long term interest rates. The exchange of letters last November was a performative exercise to make it look like the Government was ‘doing something,’ when it clearly had no intention to actually target affordable house prices.

Overseas overnight, Australia signed a Free Trade Agreement with Britain that phases out lamb and beef tariffs over a decade and removes the requirement for British backpackers to work on Australian farms for three months before they can extend their work visas. Australians in Britain can also work for three years and the age limit is lifted to 35 from 30.

The hope for New Zealand is that we can negotiate something similar. Trade Minister Damien O’Connor is in Europe at the moment for talks on FTAs with both Britain and the EU.


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