Maybe. Yesterday, the Reserve Bank signalled enough concern about rising house prices in Auckland that they spooked commentators with the possibility of early rises in the Official Cash Rate (OCR) and a more certain resolve to use complementary tools, like loan-to-value ratios.
I have more hope following this statement that the Reserve Bank has learned a lesson or two from the damaging housing bubble of 2002-2007. The Bank has been forced to show leadership given the dearth of it from central government.
The most significant shift in Reserve Bank thinking is that they now see low mortgage rates primarily driving the Auckland house prices rather than real supply-side factors like migration and land supply. Easy credit is driving this housing price cycle more than anything else.
Another metric the Reserve Bank has calculated (with provisos) is the astonishing and enduring faith New Zealanders have in rising house prices. Seventy-three percent of household wealth in New Zealand is invested in housing. This compares to 56 percent in Australia.
The absence of a capital gains tax is likely to be one of the primary drivers of this misallocation of wealth and is likely to be one of the key reasons why the fortunes of our economy rise and fall in step with house prices (see figure 1).
Given the fragile nature of our current economic recovery – a high exchange rate hurting manufacturers and exporters, cuts in government spending, and now drought – the Reserve Bank can foresee a scenario where a speculative bust in Auckland house prices would be hugely damaging to our banking sector and economy.
I’ll be watching what, if anything, they do differently this time around given the Bank’s fondness to rely on one tool – the OCR – to achieve everything. Don’t forget that over 2002-2007, the Bank increased the OCR by 350 basis points, mentioning concern over increasing house prices 17 times in their accompanying statements, yet New Zealand still experienced, in the Governor’s own words (p23), “the most rapid house price appreciation in the OECD during that period”.