New Zealand Finance Minister Grant Robertson now requires the Reserve Bank (RBNZ) to consider the impact its monetary policy decisions have on house prices, following a revision to RBNZ’s remit. This has created some significant ripples in the property finance sector.

While the Government’s Monetary Policy Committee’s main objectives remain unchanged (targeting inflation and employment), the revised remit will increase focus and understanding on the Banks OCR decisions and the impact on house price sustainability.

Rising House Prices Need Attention

The rationale is simple—record-breaking low interest rates have bolstered demand for housing and credit, pushing house prices to astronomical levels. This change has called into question the Government’s stated commitment to improving housing affordability for all New Zealanders.
The revised remit stipulates the Government’s policy is to “support more sustainable house prices, including dampening investor demand for existing housing stock, which would improve affordability for first-home buyers.”
Robertson said the Committee could decide how its decisions take account of housing consequences, but it will need to explain how it has sought to assess their impacts regularly. The new remit takes effect from 1 March.

What does this mean for Monetary Policy?

The Monetary Policy Committee has stressed, “prolonged monetary stimulus” (low-interest rates) is necessary to protect employment and promote economic expansion following the economic shock caused by COVID-19. It said it would maintain the current policy until it was confident inflation is “sustained” at 2% per year, and employment is “at or above” its maximum sustainable level.

In this regard, we do not expect the revised remit to impact OCR decisions. In fact, the RBNZ openly opposed the New Zealand’s Governments initial proposal late last year to require it to consider house prices when setting monetary policy, arguing it would instead be made to view house prices through the way it regulates banks (through macro-prudential tools such as ‘loan-to-value ratios’ and ‘debt-to-income ratios’).

Despite such opposition, the new directive has been issued to the RBNZ (under section 68B of the Reserve Bank Act). In a statement from RBNZ Governor Adrian Orr, the Governor reinforced his previous comments, saying that the RBNZ’s actions are among “many” that influence house prices.

Restricted bank lending

However, finance minister Grant Robertson asked the RBNZ to provide advice on restricting borrowers’ debt-to-income ratios and interest-only mortgages.

“I want to understand the extent to which interest-only mortgages (particularly to speculators) pose risks to financial stability and whether restrictions should apply,” he said. He added that jurisdictions such as Australia have in the past applied restrictions on interest-only mortgages due to financial stability risks.

He said he had already made clear in principle that he would want these to apply only to investors, thereby impacting those wishing to attain investor loans. “It’s important that any potential restrictions do not disproportionately affect first-home buyers and low-income borrowers,” said the finance minister.

Orr had earlier told the media that he did not share Robertson’s view. Orr said: “It is incredibly difficult to segment any market and any individual with macro-prudential tools. The phrase “macro” means it’s the same tool for all. So, pretending we could fine-tune for a particular set or groups comes with great challenge and implications.”

The RBNZ has already applied more onerous loan-to-value ratio (LVR) restrictions on residential property investors than it has on owner-occupiers, requiring them to have larger deposits when taking out mortgages.

Should the Government agree with the RBNZ’s recommendations, it would not be surprising to see debt-to-income ratios and restrictions on interest-only loans implemented in 2021. While such measures may take some heat out of the market, the single most crucial factor driving current market conditions remains interest rates.

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