Dr Victor Luca
14-Oct-21, Unpublished, Revised 2-Jul-22.
In a series of articles I published in the Beacon some time ago I delved into the causes of the housing crisis. Among the main causes I identified were as follows:
1) Shortage of supply - itself a symptom of demand growth due to population increase and local and foreign buyer activity. An annual increase in population of 2% per annum corresponds to a population doubling time of 35 years.
2) Lack of land availability - A responsibility of territorial authorities.
3) Resource Management Act and building regulations.
4) Monetary policy – this is determined by government, the RBNZ and commercial banks.
I think we can probably agree on most of these.
Among the existential crises that humanity faces from climate change, pandemics, nuclear war and so forth there lurks a more, perhaps mundane, yet rather sinister crisis that is affecting up to 40% of New Zealanders. I am talking about the housing crisis and it has received considerable, albeit superficial attention in major news media. Government and pundits from all sides of politics have identified many of the same issues I identified above but none of the potential solutions put forward thus far seem to have had any impact on slowing house price inflation. Here I wish to focus on item 4, the role of monetary policy.
As I have pointed out many times before, in section 169 of the RBNZ Act of 1989 it clearly stated that “It shall be an objective of the Bank to exhibit a sense of social responsibility in exercising its powers under this Act”.
In November 2017 the newly elected Labor Government announced it would undertake a review of the Reserve Bank of New Zealand Act 1989 to create a modern monetary and financial policy framework . The wording relating to social responsibility was removed from the 2021 version of the act which came into force 1-Jul-22. One has to ask why this was done?
Could it possibly be that under the 1989 version of the act, nothing that the RBNZ did ever met that social responsibility objective? How could the RBNZ meet that requirement when it has allowed house prices to rise to the extent that a ‘normal’ New Zealander not expecting to inherit a substantial amount of patrimonial wealth ever hope to own a home, or for that matter, even afford to rent one? The answer would have to be a resounding NO!
Despite the clearly stated social objective of the RBNZ in 1989, the only objectives that are ever mentioned in major media these days, and since the reforms are financial stability and employment. Few would argue that these are certainly important but not more so than social stability.
In an article entitled ‘unaffordable housing revisted’ I showed the clear correlation between money supply and the house price index (HPI). I do not believe that it is much of stretch to suggest that the recent obscene increases in house prices are rooted in the expansion of the money supply by government and the RBNZ and lending policies of commercial banks that are given a licensde to operate by governments. The more easy money that is created and pumped into the system, the easier for those with capital and assets to raise debt and finance the addition of another house to their portfolios. This has essentially engendered an insidious housing Ponzi scheme. This is not exactly rocket science! Complicit in fueling this scheme are those that hold and control the nation’s purse strings; the government, the RBNZ, NZ Treasury and the various private banks many of which are nominally Australian with substantial numbers of international shareholders.
Government and the RBNZ have seemingly tried various means to slow house price inflation but so far they have failed abysmally. Their interventions have been weak and have come too late. They are trying to close the stable door after the horse has bolted.
These actors in a fundamentally flawed system have fiddled around the edges whilst at the same time trying not to rock the boat too much. For instance, the foreign buyer ban, which came into effect in October of 2018, was an attempt by Government to take the heat out of the housing market. If this had any impact, then it was surely a very small one.
Government has tried to add to supply and they claim they are on track to add a paltry 8,000 new dwellings to the housing stock by 2024 (about 2,500 houses per year). This number of additional homes, when/if they do eventually hit the market, is only a small fraction of what is needed. I wont elaborate on the abysmal failure that was Kiwi Build.
One of the latest measures taken by Government is a modification to the bright line property rule. If you sell a residential property you have owned for less than 10 years you may have to pay income tax. This rule also applies to New Zealand tax residents who buy overseas residential properties. Note that this rule does not apply to properties acquired before 1 October 2015.
So I would like to know from RBNZ governor Adrian Orr and his committee of so-called experts, how exactly it is that the RBNZ has exercised “a sense of social responsibility in exercising its powers”? All I see is many undesirable socio-economic indicators on the increase including wealth disparity, youth suicide, crime and so forth.
Instead, it seems to me that all government and their buddies have done is fueled the housing crisis by guaranteeing that the new money that they have created on our behalf has flowed into mortgages via the loan policies of private banks who are happy to loan for dirt, bricks and mortar but not for business or infrastructure, climate change mitigation, green energy and so forth.
Perhaps someone (the people) should initiate a class action law suit for the absence of evidence for how it is that the RBNZ has attempted to meet its social objective. Surely the RBNZ cannot claim that they have done anything at all to meet their social responsibility by exercising powers given to them by ‘we the people’ since no impact can be demonstrated.
A fix of the housing crisis is going to require a hell of a lot more than the fiddling around the edges of the economic system as has been done so far and clearly has not worked. Another looming threat from monetary policy will be what happens to highly leveraged households as inflation rises and interests rates are cranked up in response to exuberant expansion of the monetary base.
Speaking of inflation, this is another measure that is not working either. How can we be using the CPI as our main inflation indicator when it doesn’t even take into account property prices?
Charles Goodhart, a professor at the LSE and former member of the Bank of England’s monetary policy committee opened a recent EVB forum with the remarkable statement that “the world at the moment is in a really a rather extraordinary state because we have no general theory of inflation” .
Goodhart refers to a recent paper by Jeremy Rudd, a senior Federal Reserve official and inflation forecaster who said “The primary role of mainstream economics in our society is to provide an apologetics for a criminally oppressive, unsustainable, and unjust social order” .
As I have said before, those that created the problem and have their hands on the levers of power should use their imaginations to fix the problem they created.
My solution to this problem is significant government intervention involving direct loans to households from government coffers coupled with a more adventurous house building program. One in which the word ‘affordability’ is taken seriously.
 Weldon, Duncan We have no theory of inflation - Inflation is the biggest debate in macro. The models don't work. 5-Oct-21
 Rudd, Jeremy B. (2021). “Why Do We Think That Inflation Expectations Matter for Inflation? (And Should We?),” Finance and Economics Discussion Series 2021-062. Washington: Board of Governors of the Federal Reserve System, https://doi.org/10.17016/FEDS.2021.062
 Reserve Bank Act Review.