The New Zealand Government is under renewed pressure due to unsustainable house prices and relentless property growth during uncertain times. With house prices forecast to rise 15% next year alone, Prime Minister Jacinda Ardern has been forced to defend her policies from all sides. The Reserve Bank of New Zealand (RBNZ) expects house price inflation to reach 9.6% for the year, and Kiwibank economists say the housing market is not consistent with an economy in the midst of a 100-year recession. While answers seem hard to come by, high-risk investor lending and cheap no-strings funding for banks seem unlikely to help.
According to Kiwibank senior economist Jeremy Couchman, double-digit price gains during the worst recession in 100 years "just don’t pass the sniff test". Kiwibank economists are no longer expecting a correction in New Zealand's house prices, with prices set to rise for the remainder of this year and the entirety of 2021. Credit growth among higher risk borrowers is accelerating, and the Reserve Bank has announced $28 billion in cheap funding for banks in an effort to stimulate the economy. While stimulus is definitely needed during a global pandemic, the surprising rate of credit growth since the end of lockdown may demand more creative solutions.
According to Mr Couchman, "A circuit breaker is needed, and the [Reserve Bank] has delivered with the likely reinstatement of LVR restrictions. Although to be clear, the RBNZ is not focused on house prices, but heading off a surge in high-risk lending." The strength of the housing market has caught many people off guard, with record low mortgage rates, the removal of LVR restrictions, and the sharp reduction of listed property leading to renewed and largely unwelcomed housing pressures.
Prime Minister Jacinda Ardern has been attacked, in part, for decisions that seem out of her control. For example, the Reserve Bank plans to create an additional $28 billion of cheap funding for banks to encourage lending, with the no-strings nature of the funding leading the National Party’s shadow treasurer, Andrew Bayly, to say it would put additional pressure on house prices. Migration and housing supply issues are also placing additional pressures on the market, as New Zealand citizens return home to an already heated market in a low interest rate environment.
According to the Prime Minister, RBNZ intervention is unlikely to help and inconsistent with national standards: “That seems a significant departure for a political party in New Zealand to move away from what has been the long-term consensus around the separation between politicians and the Reserve Bank... There is a very good reason why we have those separations. We learned some hard lessons as a country several decades ago.” While the central bank has plans to restate the high loan to value ratio (LVR) lending limits that were removed in May, underlying market supply also needs to be addressed, along with surrounding structural and regulatory issues.
