Government sceptical about Reserve Bank proposal
By Richard Harman (author)
Finance Minister Bill English and Government MPs appeared sceptical yesterday at the suggestion by the Reserve Bank that it would soon be time to clamp down the Auckland property market.
The Bank’s Governor, Graeme Wheeler, yesterday said he would see Mr English soon to discuss a set of proposals.
He made the comments at his press conference over the release of the Bank's annual Financial Stability Report.
This comes against the background of an overheated Auckland property market in which 42% of house sales are to investors and which Mr Wheeler believes poses a threat to the stability of the financial system.
Mr Wheeler quoted house price to income ratios which showed the Auckland was at nine against five point three for the rest of the country.
“So Auckland is 70% ahead of the rest of the country regarding that ration,” he said.So that’s a concern.
“We know that Auckland is one of the most expensive cities ion the world regarding that ratio.
“We know that investors are a big part of driving the market there, they account for about 42% of transactions.”
Deputy Governor, Grant Spencer, who in two speeches last year warned of the danger of an overheated Auckland property market, suggested that the Bank could look at applying measures to restrain housing investors.
He said the Bank was studying debt to income ratios limits which would be applied by banks to people seeking mortgages.
He said these would be more likely to impact on investors because they tended to have mortgages with high debt/income ratios.
He said a debt to income ratio requirement could also simply be restricted to investors rather than owner-occupiers.
He said one reason for that would be what was happening to monetary policy world wide.
“Given what’s happening globally with monetary policy it’s not feasible to increase interest rates in the foreseeable future,” he said.
“So we have credit growth growing at around eight to nine per cent a year so macro prudential policy will have to play a role in trying to reduce the demand for credit.”
But when Mr Wheeler and his team went across the road to Parliament and me with the Finance and Expenditure Committee they faced some sceptical questions about their whole Financial Stability Report.
Hunua MP, Andrew Bailey, referring to the overall report said the was a suggestion that the banking sector was more at risk.
“But given that the New Zealand economy is pretty strong by world standards and also the banking sector itself is extraordinarily profitable, are you over playing that risk?” he asked.
“It just seems that there is an extraordinary amount of resilience in the New Zealand banking sector.”
Mr Spencer said the Bank was concerned about what would happen during a period of extreme volatility, a global meltdown for example.
“New Zealand is still a debtor country and the banks borrow on our behalf so it’s a risk that is still there but we totally agree that the banks are well placed to manage such volatility.”
There were other questions about the Bank’s stress tests and assumptions sued in its forecasts.
And Mr English was clearly sceptical about the need for further macro-prudential restrictions on housing.
“One aspect of macro-prudential tools is that they can have unintended consequences,” he said.
“They might have some impact on house prices but that might be short term.
“They may end up creating more complexity.
“It’s up to the Reserve Bank to do the analysis and put together a proposition.
“We haven’t seen any of that in detail.”
Instead, Mr English was placing an emphasis on the finalisation of Auckland’s Unitary Plan and also the development of the national Policy Statement on urban development as a way of increasing the supply of housing in Auckland.
But that will be a challenge.
Mr Wheeler told the Select Committee that the housing supply deficit in Auckland was probably about 3800 a year.
The politics of this are simply, though --- as National MPs like to say, no one wakes up and complains that the value of their house has gone up.
And that’s particularly true in Auckland which the Prime Minister said at the weekend National must win if it wants to stay in Government.