Economic Weekly: Knockin’ on housing’s door

After a period of gazing at overseas events, the focus for this week is more firmly back onshore with Wednesday bringing another dairy auction, the RBNZ’s Financial Stability Report (FSR), and labour market data.

Dairy prices should prove resilient enough to support $7.50+ farmgate milk prices for this season and next.  Local production is faring well heading into autumn, and in time it will be interesting enough to see how this late flush counterbalances the continued strong buying interest from China.

The FSR is going to bring the attention back onto NZ’s housepocalypsearmageddon.  The November FSR was released when the housing market was evidently heating up over and above a post-lockdown rebound and the Finance Minister had just written to the RBNZ Governor suggesting that monetary policy decisions take into account house prices. 

Since then, the action has only heated up in the market and in the Government’s responses.  The Government has tweaked the RBNZ’s Monetary Policy Remit so the Monetary Policy Committee needs to assess the impacts of monetary policy decisions on the Government’s housing policies (namely discourage investors from buying pre-existing homes).  The RBNZ also needs to have regard to house price sustainability with its financial stability decisions.  Finance Minister Robertson has also announced that he will establish a new framework for deciding what type of lending the RBNZ is permitted to restrict.  Until now, there has been no formal oversight of what tools the RBNZ can use other than the RBNZ Governor and Finance Minister signing a Memorandum of Understanding over what lending restrictions the RBNZ would employ.  The devil will be in the details of how prescriptive this process will be and whether there are any tensions between what types of lending the Government would like to see restricted (and what not) relative to the RBNZ’s assessment of where it sees the financial stability risks as being greatest.

And of course, when it comes to assessing the risks, the housing outlook is up in the air in the wake of the Government’s tax changes to discourage residential property investors.  Accountant: put my tax deduction in the ground, I can’t use it anymore.  We’d expect the RBNZ to still be unsure about the impacts on house prices and financial stability.  The changes are likely to sound the death knell for continued unbridled capital gains and further stretch in house prices relative to incomes and rents.  But there is also the risk that the tax changes are a little too effective, so the RBNZ want to take the time to see what happens – and has no new tools to use yet anyway.

To round out a busy Wednesday morning, the labour data for the March quarter will be out.  The influences on employment and wages are a curious mix of flat activity, slow population growth, emerging skill shortages yet regional pockets suffering from the lack of international tourists.  We expect flat employment over the quarter yet a marginally lower unemployment rate, with annual wage growth likely to start building over the course of the year.