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Today in economic news...

...Labour instructed the Reserve Bank of NZ to consider the impact on house prices when making decisions

In a move to convince people that Labour can do something about runaway house prices, Grant Robertson has instructed the Reserve Bank of NZ (RBNZ) to factor government policy on house prices into its monetary decisions. In response, RBNZ Governor Adrian Orr warned of adverse trade-offs, I am guessing hinting at the potentially negative effects for people like mortgage holders or investors (check out this article on unintended consequences).

The RBNZ is obligated to factor in policy on affordable housing, rather than making a decision solely on that basis. The RBNZ is seeking additional powers to give effect to this instruction e.g. debt-to-income ratios for investors. Theoretically, if investors can borrow less, there is less chance of them snapping up houses and outbidding first home buyers. On the odd, rare occasion, you might see interest rates used to cool demand for housing. The RBNZ's mandate remains the same.

The move primarily appears to be an effort to cool investor demand, and speculators specifically, rather than demand from first-home buyers. However, it is unclear yet what the RBNZ might actually do in terms of utilising the tools at its disposal to support government policy on affordable housing.

This type of policy is mostly demand-driven, with potential supply ramifications

NZ's core housing affordability issues are unfair tax treatment of houses and supply constraints driven by the fact that we can't build enough houses. This move does nothing to address those key tax and supply issues - it's about cooling demand. Government policy is mostly about addressing speculative demand for now, with measures like loan-to-value ratios or RBNZ action.

Demand-based policy is likely to have little effect on house prices in isolation. The decrease in demand from investors/speculators probably isn't significant enough to see a sustained or significant decrease in prices. An increase in supply is needed to make a difference, and Labour knows that. People have to live somewhere and in by far the majority of cases that will be a rental or buying your own home, unless you are lucky enough to live with your parents. Demand for housing as somewhere to live is reasonably inelastic.

Trying to reduce investor demand through something like a debt-to-income ratio makes sense if it is possible to accurately target speculative investors buying property on the assumption it will go up. If the policy ends up harming investors building new homes, or upgrading old homes, there is a risk of reduced construction of houses which would be bad for everyone.

Young property owner in the news comic

Reducing demand is easier than tackling the supply issues

Realistically dealing with the supply issues is much trickier than the demand. Increasing supply requires massive coordination across the public/private sector, changes in legislation and tax treatment, relaxing zoning restrictions and making it easier to build in the first place. That type of change can take a generation. There are reasonably well-established tools for addressing demand.

Chances are Labour will only have a short window to deal with the supply issues, relatively speaking, to the length of three-year (or more if they are reelected) election terms. Even if they are successful in some small way, odds are they won't be around to reap the political benefit. Unfortunately, housing affordability is one of those challenges that takes multiple concerted efforts by both parties for many successive electoral terms to make a difference. Welcome to one of the difficulties of the democratic process.


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