Who’s to blame (or credit) for the post-Covid house-buying frenzy in New Zealand?
For that answer, all roads appear to lead to the Reserve Bank.
The Government certainly seems to think so, asking Governor Adrian Orr to consider “stability in house prices” as part of the Reserve’s remit.
Economist Tony Alexander says the Reserve has been easing monetary policy since 2015, cutting interest rates bit by bit.
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“They’ve also been easing the loan to value ratio rules since the start of 2018,” he says.
At the start of the Covid crisis, as the country went into lockdown and an uncertain future, Orr said the Reserve was suspending the LVRs for 12 months and cut rates to a historic low. There has been talk about negative interest rates for next year, which Alexander says is unprecedented for New Zealand.
“They have emphasised they are expecting to keep interest rates low for a very real period of time and the Reserve Bank Governor has made a relatively strong statement suggesting the alternative to house prices rising is a great depression. I found that statement somewhat extraordinary but it reinforces the Reserve Bank is not going to stand in the way of house prices rising,” Alexander said.
The key driving force for the housing market has been the loose monetary conditions created by the central bank in response to what was a pretty dire outlook back in March and April, Alexander says.
While he doesn’t fault the Reserve for that stance back he does think it should be pulling back more aggressively on the LVRs and on money printing. “I think they should pull back on saying they could have negative interest rates as well,” he says.
Out of whack
It is warranted interest rates remain low in the absence of inflation for a long time but other stimulus for the economy isn’t needed, he says.
The reinstatement of the LVR won’t make much difference, however, when it does come in March next year.
“It will take some of the heat out of the market but I still expect prices to be rising.”
The low interest rate environment has contributed to the fear of missing out, which is also driving the market at the moment. Alexander doesn’t think we will continue to have house prices rise at three percent a month, as happened in October.
“That was just out of whack, but I look at it this way: in the six months leading into March, so including March, the average increase in house prices around New Zealand was 1.1 per cent a month. Since March the average increase in house prices has been 1 per cent [a month]. That’s where I think we’re pretty much averaging going forward,” he says.
Reserve Bank Governor Adrian Orr's response was to cut interest rates and suspend the LVR restrictions. Photo / Getty Images
“Once the LVRs are in place we’ll pretty much settle back into around about a 1 per cent a month increase.”
And Alexander thinks the fear of missing out phenomenon will ease after summer. “I’m thinking summer will continue to be reasonably frenzied. There’s still a lot of people out there with capital, that money they’ve got on term deposit, so I think the FOMO’s going to remain pretty strong. My best guess would be first half of next year we do have FOMO coming off.”
What Alexander does predict is a building boom over the next few years as people look for ways around the soaring house prices. “That’s tremendously positive for our economic recovery and eventually house prices settling down with rising supply,” he says.
Brad Olsen, chief economist for Infometrics, says who you blame for the hot market this year depends on the shoes you are standing in. “If you’re the Property Investors Federation, it’s first home buyers. If it’s the Government, you’re looking anywhere but yourself.
“If it’s the Reserve Bank, you’re both pointing the finger at yourself and with the other hand saying, ‘Well, it’s got nothing to do with us.’
“There’s a lot of finger pointing that I think is going on.”
No other option
Olsen says it doesn’t matter whose fault it is, what matters is what’s being done about it and no one is making any big inroads.
“From a finger-pointing point of view, and if we do want to play the blame game, I think this is a question of unintended consequences on one hand but also of the bluntness of some of the tools we’ve been able to utilise,” he says.
“It’s undeniable that interest rates going substantially lower, coupled with taking off LVR restrictions, has brought an incredible amount of heat into the housing market, with every man and his dog trying to buy a house and probably as many as they can justifiably get.
“We’ve seen that both in terms of just general lending but we’ve also seen it in terms of some of those riskier loans coming through in terms of investors, so that’s one key area.”
Economist Tony Alexander: "I still expect prices to be rising.” Photo / Supplied
But while the Reserve Bank has done this, Olsen says that is exactly what they were asked to do. “Their mandate does not extend into pure targeting house prices and indeed if you ask them around that they’d probably push back and say ‘what is a good house price growth?’
“It’s undeniable they really have had no other option to do anything but what they have currently done given the limitations they have.”
Olsen puts the blame further back in terms of what governments have neglected to do, such as ensuring houses are built at pace and scale. “Because, although in the short-term these demand changes have been huge, the swiftness of the demand response has only been able to be to that large degree because of how imbalanced supply is and how few homes we have relative to how many people are out there in the market.
“The real blame I think should be pointed I think at the regulations that stop anyone from moving ahead in the housing market. We should be making development easy, not this process you want to give up at every single hurdle that’s put in front of you.”
Low cost of money
But Covid 19 is also to blame for this year’s hot housing market conditions. “That’s where we have to slate it back to in general and what we have seen is the Reserve Bank needed to provide substantial amounts of stimulus to support the economy.
“The indirect effect of that were interest rates were lower and therefore people were looking for where to put their money, both in terms of where to get a return but also where to avoid not getting a return.
“People were saying ‘look, I want to make some money but I’m not getting anything from my term deposit or my bank so I need to find a better yielding vehicle and housing is that vehicle.”
OneRoof columnist and former Property Institute of New Zealand CEO Ashley Church thinks people will look back on this year and blame a combination of property investors and the fall in immigration but the real cause is the low cost of money.
“It’s got nothing to do with any of those other groups. It’s the fact that money’s getting cheaper and the messages from the Reserve Bank is that the cost will stay down for a long time and that’s giving people confidence,” he says.
The low rates are giving people the ability to spend more and the confidence to do just that, which in a sense makes the Reserve Bank the bogeyman.
“It’s the Reserve Bank that’s obviously sending the signal to the market that rates should come down and it’s doing it for reasons that are unrelated to property – it’s doing it because it wants entrepreneurs to borrow money from the bank and fund productive activity but it can’t differentiate between the two so a lot of it is spilling over into property investment and that will continue.”
Church stops short of blaming Covid-19 for the current market conditions, saying property cycles mean the Auckland market would have taken off next year anyway.
“In that sense the increase in property values in Auckland is basically a year ahead of itself and in that sense I think we can blame Covid, in that the Reserve Bank has responded to Covid with these lower interest rates and that’s what has fuelled the growth.”
