The Government scrambled yesterday to try to respond to the Auckland housing crisis, effectively giving the Reserve Bank the green light to crack down on rental property investor lending. It also implored the Reserve Bank to ignore the currency's rise to avoid further substantial interest rate cuts that would pour even more fuel on the fire.
John Key and Bill English effectively called the Reserve Bank in as a fire brigade yesterday for help to try to douse the fire spreading from Auckland, and diverting that water of interest rate cuts away from the export sector.
To illustrate the way the Auckland housing market is distorting the economy right now, it's worth highlighting how milk powder prices have fallen 12.8% in NZ dollar terms in the last six weeks because the currency has risen at the same time as commodity prices have fallen because the currency markets know the Reserve Bank's hands are tied by its concerns about Auckland's financial stability risks.
The Reserve Bank is mobilising new lending controls to try to squeeze its way out from between the rock of lower interest rates and the hard place of Auckland housing as fast as it can, and now the Government is cheering it on as the political flak over the Auckland housing boom/crisis intensifies.
Key yesterday made his bluntest comments yet to indicate the Reserve Bank is preparing a third round of lending controls on landlords in high growth areas, possibly to be signaled as early as Thursday evening.
The comments came as figures from QV and Barfoot and Thompson showed housing inflation accelerated in June, at least partly due to rental property investors leveraging up to buy into higher growth markets ahead of any crackdown.
The Government also came under sustained attack inside and outside Parliament on the issue of housing shortages and increasingly unaffordable housing. (See more on that in Parliamentary exchanges of the day). At the same time, Labour said it would announce a major new package of demand-side and supply-side housing packages over the weekend. (See more on that below.)
The focus on new lending controls tightened after the Reserve Bank announced yesterday morning that Grant Spencer would speak about macro-prudential policy and housing market risk in a speech to be released at 5.30 pm on Thursday.
Key was asked on the way into Parliament's question time about the speech and what the Reserve Bank was considering.
Spencer and Graeme Wheeler signaled on June 9 they were considering the potential for a third round of LVR controls by the end of the year "or before that." See our June 10 email for all the detail on their comments.
Speculation has intensified in recent weeks that the Reserve Bank could either lower the current 70% LVR threshold for rental property investors in Auckland, and/or extend it to the rest of the country.
Key told reporters he did not know what Spencer would say in the speech, but that the Government had been having regular discussions with the Reserve Bank about the issue.
'They should get on with it'
Asked about Spencer's planned speech and whether the Reserve Bank needed to introduce a third round of controls on investors, he said: "Yeah, I think there is a responsibility for the Reserve Bank to have a look at the question around investors. We've had those discussions with the Reserve Bank."
"They can control that part of the market and I don't know exactly what he'll say on Thursday, but certainly the government's perspective I think has been that having a look at that might make some sense," he said.
Asked if the Reserve Bank could extend the Auckland investor restrictions across the country and/or further lower the threshold in Auckland, Key said: "My own view is that he should make some movements in that area, yes."
Asked if he was optimistic about the Reserve Bank further tightening those restrictions, he said: "Not on Thursday, but over time, potentially."
Key said he had had broad ranging discussions with the Reserve Bank.
"It's a double edged sword, of course. You need investors in the market to make sure there is rental property, but my sense is that potentially one of the risks is that you have got people buying properties at the moment, borrowing more money, but fearful that the Reserve Bank is going to move," he said.
"So if they are going to make changes, probably better they should get on with it."
I then asked Key if it was an issue all over the country or just in Auckland. "It depends a little bit. It's in those high growth areas. Actually if you look at the QV data, Auckland did go up, obviously, rapidly, but places like Tauranga and Hamilton were faster," he said.
I then asked if he preferred the Reserve Bank should focus on Auckland or all of the country: "They should look at those high growth areas."
Labour plans big housing policy launch
Meanwhile, Labour and the Greens ramped up their attacks on the Government on housing in Parliament and Andrew Little said Labour planned to launch package of supply and demand side housing policies later this week.
He said the bulk of the package would be announced on Sunday in Auckland, but other announcements would also be made on Thursday and Saturday.
Labour took a policy of building and selling 100,000 affordable houses over 10 years to the 2014 election. That policy of borrowing NZ$1.5 billion to kick-start the building and then recycling funds to build more was developed and announced in 2012 under then-leader David Shearer, and Little has been supportive of the policy since. He also indicated yesterday Labour would also keep its policy of banning foreign buyers of existing houses.
Little told reporters Parliament he would not detail the nature of the policy, although he said it would address both the demand and supply sides of the equation and would involve some modest borrowing in the short term.
He did not rule out that the package would address the issue of speculation by rental property investors using negative gearing. Little has previously ruled out Labour campaigning again for a Capital Gains Tax, but Labour has said it plans to convene a Tax Working Group after the election to address taxation of capital and land.
Little said he didn't think a Arthur Grimes' style supply shock of 150,000 new homes was necessary and he did not want to see prices falling.
"What we do need to see is affordable housing added to the housing stock," Little said.
"We have a comprehensive announcement to make later this week, in fact Sunday is the main course of the announcements, and you will see our comprehensive response to the housing crisis. I am not going to give away details now, but we thought very carefully about what the needs are in terms extra housing, extra affordable housing, extra social housing and the means to deliver that, and you will hear all that on Sunday," Little said.
Training and negative gearing addressed
Little said the package would also address the issue of training and finding tradespeople for a substantial house building plan.
"You will see in our package that we put up, obviously part of the issue when you are embarking on a big building programme is the workforce that goes with it and there will be workforce measures as well," he said.
"There will be measures that address the demand side of the problem. I don't want to get into a whole heap of details now because the beauty of scheduling an announcement is that we all live in anticipation, but Sunday will be the main course and you will see what we have to offer," he said.
"The main thing is this: this government for years now has denied there is a problem, done nothing, and in the last few weeks have made serial efforts to give the appearance of doing something. What they turned up is a hotchpotch of ideas, fiddled and faddled around, and actually got nothing meaningful. They did nothing in the Budget. They had an attempt on the eve of the Budget to scrabble together Paula Bennett's policy that nobody else knew anything about, and this weekend they've announced something that simply will not fix the problems that we have got. The announcement I make on Sunday (and the other announcements leading up to it) will amount to a comprehensive package to deal with the fullness of the housing issues we have in New Zealand."
Asked again about the issue of negative gearing by rental property investors, he said: "If the question is, 'do I have a great deal of sympathy with the speculators and the land bankers and the others who are just looking for capital gain?', no I don't."
English gives RBNZ free pass on TWI
As if to emphasise the Government's focus on avoiding yet more fuel of lower interest rates being poured on the housing market, Bill English appeared to give the Reserve Bank a free pass yesterday to ignore the currency's rise to a 14 month high of 77 on a Trade Weighted Index (TWI). The currency is now 6% above the 72.6 assumption in the Reserve Bank's 'high TWI' scenario in its June Monetary Policy Statement, which assumed the Official Cash Rate would have to be cut to 0.75% by early 2018 if nothing else changed.
English told me and other reporters before National's caucus meeting that the Reserve Bank appeared unlikely to be able to do much about the currency because the traditional linkages between the Official Cash Rate and the currency had broken down.
He said observers should not be too hard on the Reserve Bank over its failure to meet its inflation targets, given what was happening in the rest of the world.
English is responsible for holding Graeme Wheeler to account over the Policy Targets Agreement, which states the bank should "keep future CPI inflation outcomes between 1-3% on average over the medium term, with a focus on keeping future average inflation near the 2%."
Annual CPI Inflation was 0.4% in the March quarter. It has been below 1% since the September quarter of 2014 and below 2% since the September quarter of 2011. The Reserve Bank's forecasts in the June Monetary Policy Statement showed CPI inflation would not return to 2% until the December quarter of 2017, which would mean inflation had been below the Governor's 2% mid-point for six years.
I asked if the high currency (over 77 yesterday morning) was a concern, English said: "Yes, but it's an indicator of the amount of uncertainty in the rest of the world. As the Reserve Bank Governor pointed out, the traditional linkage between interest rates and the exchange rate doesn't appear to be holding at the moment."
"He's cut interest rates quite a lot in the last 18 months and the exchange has actually gone up and you would not have expected that to happen. When you look around the world and see Sterling falling, the US dollar probably softer than we might have expected, uncertainty about Italian banking issues building up inside the European Union, bit of political uncertainty in Australia, you can see why relatively speaking New Zealand's currency looks for now a bit more reliable than most," English said.
Aren't more even more OCR cuts needed therefore?
I asked if Wheeler should therefore be cutting the OCR by even more, English said: "You'd need to talk to the Governor. He was pointing out that cutting interest rates didn't seem to have affected the currency. We are in a pretty strange economic world. The Swiss or Japanese Government is issuing 20 year bonds on negative interest rates. No one really knows what that means or what all the implications of that are. It's a bit hard to draw simple conclusions from a movement in interest rates or a movement in currency rates."
Asked if the economy and exporters should therefore just have to sit there and take the higher currency, he said: "It's a rate set by the market. There's a lot of dangers in trying to use your Reserve Bank to play around with the exchange rates, particularly in a world where no one really quite understands how different economic indices are going to interact. Normally you would expect a flow through from currency connections to inflation and interest rates, and that's part of the very difficult task that the Reserve Bank has."
"The relationships which in the past which we assumed were quite mechanical, now just don't seem to hold. I'm sure if it was easy then they would have easily hit the target. One of the challenges for this central bank and others is that any given day you can't really judge what the right decisions is. You can only really judge in hindsight so they've got a real dilemma."
Most economists expect the Reserve Bank to cut its OCR again on August 11, with the potential for one more cut to 1.75%, partly because of the very high TWI.
When do you hold the RBNZ accountable?
I then asked English when he would hold the Reserve Bank accountable for not meeting its inflation targets.
"You've got to keep in mind a wider context. They're dealing with a world where it's been pulling towards 0% interest rates and they're trying to get ours up, and that's a real challenge. In the light of the very complex economic environment we're in, we shouldn't be too hard on them," he said.
In other economic and financial news...
The NZIER's Quarterly Survey of Business Opinion (QSBO) found a rebound in confidence in the June quarter after the March quarter's sharp drop. The survey, which was conducted before the Brexit vote, found a net 19% of firms expected their own trading to improve, up from 6% the previous quarter and back to near the 20% seen in the December quarter of 2015.
A net 18% expected general business sentiment to improve, up from a net 2% expecting a worsening in the March quarter. Confidence improved in the construction and manufacturing sectors, although it remained subdued in rural areas affected by unprofitable dairy payouts. Despite the stronger confidence, capacity utilisation and pricing pressures remained subdued. "The subdued inflation outlook indicates further scope to cut the OCR," said Christina Leung.
QV reported Auckland house values rose at an annual rate of 16.1% in the three months to June and the average value rose to NZ$975,087. That's a monthly rise of NZ$15,000 so at this rate Auckland will hit the NZ$1 million mark by the end of August. Hamilton values rose at an annual rate of 29%, Tauranga rose 24%, Wellington rose 14.4% and Queenstown Lakes rose 25%. A townhouse in Petone sold for NZ$1.15 million, QV reported. Only Christchurch was subdued with annual house value inflation of 3.6%. Opotiki values rose 21.6%.
QV highlighted the role of rental property investors in the fresh acceleration of house values, pointing out that CoreLogic data showed 46% of all sales in Auckland in June were to investors, up from 37% in 2012. "The Reserve Banks is considering introducing further restrictions on property investors and it appears this may have led to a surge in investor purchases in various housing market around the country over the past month," QV's Angela Rush said.
Barfoot and Thompson reported the freshest sales figures for Auckland, saying its average sales price rose NZ$33,720 in the month of June to NZ$908,343. That's NZ$1,124 a day in June. Just 67 of the 1,168 properties sold through Barfoot in June were sold for less than NZ$500,000.
In another sign of fresh deflationary pressure for the Reserve Bank to combat across the economy, the Electricity Authority published its annual residential market review showing that average residential costs fell 1.7% in the year to March, the first fall in 15 years.
As if to emphasise the pain for exporters of a currency inflated by Auckland's housing market conundrum, dairy prices fell 0.4% overall in last night's Globaldairytrade auction, including another 1.6% fall in the wholemilk powder price used to set the milk payout.
Powder prices have fallen 8.4% to US$2,062/tonne since May 17, while the New Zealand dollar has risen 5% to 71.5 USc. That means the New Zealand dollar price of wholemilk powder has fallen 12.8% in the last six weeks.
Treasury reported that the Government's Operating Balance Excluding Gains and Losses was a surplus NZ$2.304 billion in the 11 months to the end of May and that it was on track to achieve the May Budget forecast for the full year to June 30 of a surplus of NZ$668 million.
Paul Goldsmith reappointed Retirement Commissioner Diane Maxwell for another three-year term.
Callaghan Innovation announced its inaugural CEO Mary Quin had resigned with effect from July 31.
Parliamentary exchanges of the day:
How many more housing announcements that were not in the Budget is he planning to make to tackle a crisis he says does not exist, or is the Budget not comprehensive any more?
John Key in response:
The member is right that it is a comprehensive plan and has many parts to it. There are always other parts of it, potentially. That is really the point, is it not, with the challenge of housing, not just in Auckland but anywhere else around the world where we are seeing this. There is no one single thing that will resolve it.
Why does he keep saying the Government should not build houses, when previous Governments have successfully built thousands of affordable houses for New Zealand families, like the one he grew up in?
John Key in response:
Because the private sector is well and truly equipped to build the houses. What it ultimately needs, though, is planning laws that support that, council plans that support that, and infrastructure that can support those builds. All of those things are happening under this Government. I really seriously think if the member is telling us the answer to resolving the challenges in Auckland's housing—or indeed housing issues around the country—is to get people employed by the Government as chippies building those houses, I think we would be better to leave it to the private sector.
When he said, over the weekend, that there is no room for Government complacency, is there a different word to describe a Government that has stood by while the average Auckland house price shot towards $1 million and the number of people who are homeless increased to record levels?
John Key in response:
I do not think it would be a fair criticism to say that the Government has stood back. We have a record level of activity taking place. We have significant parts of the plan—that, actually, the member's own party has resisted. I think it is worth remembering that if you go back and have a look at the first 3 or 4 years when I was Prime Minister, the issue of housing was not a significant issue. What has turned round in that time is that New Zealand has become a much more attractive destination, interest rates are lower, optimism in the economy is very strong, and the Government's policies are working—which is actually driving much greater demand in the New Zealand economy. So we have responded to that—that is why there are so many more houses being built in Auckland. Do we need to build some more? Yes, but we are working on that.
Tweets of the day:
So we need: 1) A Prime Minister 2) An Opposition Leader 3) An England manager 4) A UKIP leader 5) A Top Gear host 6) A new economy 7) Gin
Toby Manhire after the SMH reported 'bedwetter' was now the barb of choice in Australian politics:
How can we sleep while our beds are wetting
Have a great day