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Insights 43: 13 November 2020
NZ Herald: Oliver Hartwich says Kiwi's are giving up on excellence to not rock the boat
Freely Speaking podcast: Why donít Kiwis enjoy deep discussion?
Policy Point: Misdirection on housing affordability unhelpful

Good news weeks
Dr Oliver Hartwich | Executive Director |
In a year of bad news, the past few weeks were a welcome exception.

Pfizer’s announcement of a potentially effective Covid-19 vaccine opens a path back to normal life. Joe Biden’s election could herald a calmer and more constructive global trade environment, not least through reviving the WTO.

Meanwhile, a Treasury update shows public finances, though still strained, are much better than initially feared. Tax revenue was higher, expenses were lower and the deficit was smaller, too.

The labour market is also looking relatively healthy. The latest number of weekly filled jobs was higher than at the beginning of the year or in 2019.

Both business and consumer confidence are still climbing steadily. Though ANZ’s business confidence index remains in negative territory, it has jumped 50 points since March – surpassing even the February confidence level.

Car sales are also rebounding from the lows of the lockdown months. Luxury brands have done especially well in 2020 – suggesting consumers are diverting their holiday budgets to new cars. We hear similar stories from the home renovation sector.

Looking to 2021, there are reasons to be cautiously optimistic about the global environment. Brexit, for example, will finally be sorted. The UK may get its deal with the EU but crucially, the uncertainty will disappear.

Parts of the world could even experience a sort of catch-up boom next year. Consumers, once released from the depths of pandemic restrictions, could reward themselves for their sacrifices.

However, many risks, question marks and clouds remain on the horizon. The new Covid outbreak in Auckland is a reminder that the pandemic is not over. New Zealand still faces a substantial surge in public debt which must eventually be repaid. But overall, the economy is showing early signs of recovery.

Should this recovery happen, it will have implications for both fiscal and monetary policy.

On the fiscal side, the better-than-expected circumstances will lead to demands for more spending since there appears more room for it. This is not a good idea since the situation remains bad enough, even if it is not catastrophic.

On the monetary side, a stronger economy will weaken the case for negative interest rates. Why push up house prices further when an upswing is already underway?

We can only hope for more good news. And then we must hope that the Government and the Reserve Bank draw the right conclusions from them.

Whatís really behind high house prices
Dr David Law | Senior Fellow |
Prime minister Jacinda Ardern dipped her toe into the debate over rising house prices by suggesting returning Kiwis are mostly to blame for skyrocketing house prices.
Ardern is wrong to point the finger at returning Kiwi’s.
New Zealand has long struggled with housing affordability. Since 2000, real house prices have roughly trebled. Incomes have not kept pace.
The issue is complex, but a lot is known about how the housing market works. For instance, supply constraints are particularly important in New Zealand and housing demand is also strong at the moment, for various reasons.
The prime minister is correct that net migration can put pressure on house prices. All else being equal, a growing population needs more homes. But new data released by Statistics New Zealand this week suggests the role of net migration in house pricing is limited right now.
Estimated net migration in the year ended September was 67,700. However, nearly all of this (65,200) took place in the six months leading up to border restrictions.
In the six months from April-September 2020, estimated net migration totalled only 2500. The figure was almost twelve times higher (29,700) for the same six-month period in 2019.
On the other hand, Covid-19 restrictions pressed the pause button on the construction of new houses.
Completed residential construction fell by 6.3% and 19% in the March and June quarters of 2020, respectively. The number for the June quarter reflects 28 lost working days due to lockdown Levels 3 and 4.
On the demand side, it may be tempting to suggest net migration is a key driver of house price growth. After all, migration is only weakly influenced by policy makers. However, it is far more likely that monetary policy is responsible for adding fuel to this fire.
The Reserve Bank is undertaking a $100 billon programme of quantitative easing. The Official Cash Rate (OCR) is also now at a record low, reduced from 1% to 0.25% in March. These two decisions alone will lift returns on investment in housing and increase pressure on house prices, particularly as supply is constrained.
If the Government cares about fixing housing affordability, it should start by being clear on the reasons for those high prices.
Read more: “Misdirection on housing affordability unhelpful

But what are the turtles standing on?
Matt Burgess | Senior Economist |
Rumours of a merger between the Reserve Bank and the Property Council have been greatly exaggerated.

The Bank will need no help to do whatever it takes to keep Auckland homeowners safe from any dip in property prices.

The RBNZ’s Chief Economist recently said, “The worse situation we’d face right now is actually if we had house prices falling.”

Yes, it would be terrible. Poor Auckland homeowners. Print enough money and house prices will soon hit $2 million. Problem solved.

But why is a central bank talking about housing at all?

The reason is that the Reserve Bank is responsible for financial stability. Housing affects financial stability. So now the Reserve Bank runs Auckland.

The Bank can get a mandate to regulate anything if it can show something affects financial stability. Needless to say, the process for obtaining this mandate is extremely rigorous.

First, the Governor must deliver a speech to a Rotary Club that is attended by at least four people and there must be biscuits at half time.

Next, the Bank must provide supporting evidence. The evidence does not need to have anything to do with what the Governor actually said. However, evidence must include the words “financial” and “stability” in at least two places.

The final step – and this is crucial – is that the Minister of Finance must decide not to sack the Governor no matter how much he might want to.

If the Reserve Bank can complete these three difficult steps, its constitutional mandate to rule is secure, obviously.

It turns out many things can lead to financial instability. Recently, the Governor said he thinks one of those things is climate change.

Fortunately, the worst effects (of climate change, not the Governor) are still years away, and there is much uncertainty.

Which means the Reserve Bank’s mandate is anything which might lead to financial instability. That kind of umbrella is rather wide. What else might fit under this mandate?

How about Covid-19? Or the entire health care sector? What about education? The movie industry? The education in movies industry? Shoes?

How about printing money?

Of course, a Reserve Bank that regulates itself could lead to financial instability. That is a problem that calls for regulation of the Reserve Bank’s regulator. By the Reserve Bank. It’s turtles all the way down.

How about the financial stability effects of elections?
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