Over the past few years, I’ve been a consistent and vocal critic of the Reserve Bank of New Zealand. I have, from time to time, expressed the opinion that the Government should instruct the Bank to reverse or amend its policy on Loan-to-Value-Ratio restrictions on mortgage deposits.
Why? Because, in my opinion, these restrictions have created the single most significant barrier to young people buying their first home and have done more damage to the market than any other factor – including house price inflation. It’s a view I continue to hold.
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But do I really believe that the Government should be instructing the Reserve Bank on matters of monetary policy? Of course not.
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Such opinions are borne of frustration at bloody-minded intransigence in the form of an insane and pernicious policy rather than a genuine desire to see the Government wading into this space. The independence of our Reserve Bank is hard won and returning to the bad old days of former Prime Minister Rob Muldoon, where Governments tinkered for short term political gain, would make any dispute I might have with a particular policy look like chicken feed compared to the utter carnage which would be imposed on the economy.
If that sounds extreme it’s worth reviewing the history to understand where we’ve come from.
In the 70s and 80s New Zealand experienced crippling inflation which did huge damage to our economy. Certainly some of this resulted from global economic events, but a significant portion of it was caused by the conflicting economic policies of successive Governments which confused their ideology and desire for popularity with the broader interests of the country.
Under Muldoon, inflation and interest rates peaked around 20% in the mid-80s. Photo / File
Muldoonism, in particular, almost bankrupted the country between 1975 and 1984. As a result, inflation was running at almost 20% by the mid 80s and mortgage interest rates peaked at over 20% at around the same time.
We often use the term ‘house price inflation’ interchangeably with the term capital growth but the two things are very different. Capital growth returns real value and wealth to the owner of a property whereas actual inflation is corrosive and destructive and eats away at the value of the money that we spend on goods and services.
That dark period in the 70s and 80s is a time which no sane country would ever want to return to again. Its impact led to the passing of the Reserve Bank Act in 1989, the effect of which was to give the Reserve Bank independent control over monetary policy and a mandate to strive for price stability, free of the interference of Government. This meant that it was responsible with keeping the annual rate of inflation within an agreed range (currently 1% to 3%) and its success in doing this over the past 30+ years has become the stuff of legend.
As a result, Kiwis have benefited from a level of price stability which has improved their standard of living and gradually increased our national wealth.
So its with all this in mind that we should be alarmed by this Governments moves to exert more control over monetary policy. This started in 2018 with the addition of an ‘employment target’ to the Bank’s mandate. It continued, late last year, when the Finance Minister wrote to the Governor of the Reserve Bank instructing him to include house prices in his decision-making process and to pursue policies to intervene in the housing market. This move was popular with the Governments supporters but signalled a huge departure from the intentions of the 1989 Act.
Yet another attack on the independence of the Reserve Bank came in February of this year in the form of a directive to introduce measures to “support more sustainable house prices, including by dampening investor demand for existing housing stock, which would improve affordability for first-home buyers”. Putting aside the fact that ‘dampening investor demand for existing housing’ will have absolutely no impact on affordability for first home buyers, the new requirement further confuses social policy and monetary policy and requires the Reserve Bank to do the Government’s heavy lifting on both.
No doubt the Government is hoping that the current global environment of low inflation and low interest rates will give it some latitude. But that’s naïve given how quickly the global economy can turn.
Instead, we now risk returning to a time when monetary policy was used to meet the short-term political needs of the Government of the day and when inflation was a sacrificial lamb on the altar of party populism. We know the potential consequences of Grant Robertson’s frightening game of ‘whack-a-mole’ because we’ve seen it all before in our recent history: higher inflation, much higher interest rates and huge damage to our productive sector.
It would be bad enough if these moves were being taken by a Finance Minister of the calibre of a Ruth Richardson or a Michael Cullen or a Bill English. But in the hands of the incompetents running our current economic sideshow – this stuff should send a shiver down the spine of every objective New Zealander.
- Ashley Church is a property commentator for OneRoof.co.nz. Email him at [email protected]
