RBNZ to support government housing objectives

New Zealand’s central bank will be required to consider the housing market when making future monetary and financial policy decisions, the country’s finance and deputy prime minister announced.

In a statement today (February 25), Grant Robertson said the government had changed the remit for the Reserve Bank of New Zealand’s monetary policy committee (MPC).

The centre-left Labour government did not, however, change the RBNZ’s mandate – a move that was being considering late last year. The measure comes amid rapidly rising house prices in New Zealand. The government also changed the RBNZ’s financial policy remit, he added. Both changes will come into effect from March 1.

“The [MPC] retains autonomy over whether and how its decisions take account of potential housing consequences, but it will need to explain regularly how it has sought to assess the impacts on housing outcomes,” said Robertson.

The finance minister also said the government was discussing the possibility of imposing debt-to-income ratios on housing loans and limiting interest-only loans.

The government has also required the RBNZ to regard the government’s housing policy in relation to its financial policy functions, Robertson added. Under the Reserve Bank Act, the New Zealand government can issue directions to the RBNZ over its monetary and financial policies.

Robertson said the central bank’s mandate hadn’t changed, and would remain focused on price and financial stability, as well as full employment.

“[The RBNZ] will have to take into account the government’s objective to support more sustainable house prices, including by dampening investor demand for existing housing stock to help improve affordability for first-home buyers,” he said.

The [MPC] retains autonomy over whether and how its decisions take account of potential housing consequences, but it will need to explain regularly how it has sought to assess the impacts on housing outcomes

Grant Robertson, NZ finance and deputy prime minister

RBNZ governor Adrian Orr said the change to the MPC’s remit would increase its “focus on understanding and communicating” the impact that its decisions had on house price sustainability.

Changes to the central bank’s financial policy operations were “in tune” with the central bank’s recent advice to the government, Orr added.

In November 2020, the finance minister had said the government was concerned that stronger-than-expected economic performance was fuelling a rise in house prices.

Robertson subsequently wrote to Orr to discuss ways the central bank could support the government’s housing objectives. The finance minister said one option was to modify the central bank’s mandate to explicitly focus on house prices when setting monetary policy.

Orr agreed there was merit in taking house prices into account when setting financial policy, in a letter to the finance minister published in December 2020. But he stressed that housing objectives should not be an explicit target of monetary policy.

“Government agencies already have a wide range of levers that could be used to address housing issues,” Orr said in the December letter.

The governor said that the finance minister could issue a direction under the central bank law. If so, Robertson “would need to specify a clear government policy to which the Reserve Bank must have regard”.

New instruments

The finance minister said he had also asked the RBNZ to provide advice on whether New Zealand should adopt debt-to-income ratios and interest-only mortgages.

“Following the bank’s request that the government allow it to make use of tools such as debt-to-income ratio limits, I’ve asked for further advice on how the bank might implement such tools,” said Robertson in the RBNZ statement.

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

The finance minister said these limits should only apply to investors and not “disproportionately affect” first-home buyers or low-income borrowers.

Increased housing pressure

In December 2020, the country’s official statistical agency reported house prices in New Zealand had risen faster than wages over the past five years. One of the main reasons cited was a lack of housing supply. The government’s data shows the number of houses increased by an average 1.3% a year between 2013 and 2018.

However, population growth between 2013 and 2018 outstripped growth in the housing stock, Stats NZ said. In June 2020, New Zealand had a population of just over 5 million.

In February 2021, data provider CoreLogic reported New Zealand’s month-on-month house prices rose by 2.2% in January. Year-on-year house price growth has risen to 12.8%, the highest growth since March 2017.

In Auckland, house prices have grown by 11% annually. The median house price in Auckland is NZ$1.2 million (US$892,000), according to government data.

At its MPC meeting earlier this week, the RBNZ said New Zealanders who returned to the country during the pandemic were adding to house price pressures.

“We had assumed that most of these people would not settle in New Zealand, and instead behave more like temporary visitors,” the central bank’s monetary policy report said.

“However, it is increasingly apparent that many of these people may be … participating in New Zealand’s economy in ways typical of permanent migrants.”

The RBNZ noted a constrained housing supply, declines in interest rates, rebalancing of investment portfolios, and the temporary removal of restrictions on high loan-to-value ratio lending were also pushing house prices higher.